Lelong said the world is now entering a phase of slower growth in which China is undergoing major structural change that is reshaping its commodities demand profile from above-GDP growth rates to sub-GDP growth rates. Along with the current global slowdown, this is partly because China’s GDP growth is becoming less energy-intensive which will cap electricity growth. The growth rates in demand for thermal coal of 10%+, seen over the last few years are not expected to continue.
He does expect thermal coal demand in 2013 to recover from the low point this year which was partly a result of strong hydropower availability. China’s electricity generation is forecast to grow faster next year than it did this year which is expected to lift the price of domestic coal and generate headroom for imported thermal coal.
Nevertheless, China is on track to import around 140Mt of thermal coal in 2012, according to Goldman Sachs.
Commenting on the current softness in spot prices for thermal coal, which have improved slightly to just above $80/t FOB, Lelong contends these levels are unsustainable in the long term without forcing eventual shutdowns and supply disruptions around the world.
Commenting on rising costs globally, Lelong said Chinese mines were not immune from cost inflation. He said most Chinese underground mines were on average at a depth of 500m, “unheard of for thermal coal mines” in the western world.
He expects Chinese wage inflation will continue to be experienced as the economy improves, living standards go up, workers require pensions and there is more health and safety regulation, with ancillary cost imposts.
“If coal production costs in China increase above the seaborne market price then imports will have further upside even if total coal consumption slows down. If Chinese coal became more expensive than Indonesian or Australian coal, that’s a great outcome,” he said, adding that coal producers would then be able to expand their share of China’s thermal coal pie, currently at about 4%.
Goldman Sachs forecasts a long-term thermal coal price of around $90-105/t FOB, premised on the current exchange rate shifting to 74 cents against the US$ (long term 2017 nominal).
Lelong also spoke about the growing threat to coal of environmental regulations where in OECD countries the fuel mix has already changed to see less money spent on coal-fired power and more dollars being spent on renewable energy.
“It will be interesting to see if this going to be just a developed economy story or whether developing economies go along the same path,” he said.
China meanwhile continues to rely heavily on coal for baseload power. Lelong said the Chinese were still adding about 50-60 GW of new coal-fired power plant capacity per annum but that this was expected to taper off.
He said China is now a significant user of wind-powered generation and by 2020 when it has met its target of 200GW of wind generation, its total wind capacity will be bigger than the rest of the world.
On China’s response to the environment, Lelong said a cap and trade CO2 emissions trading scheme was under development and that a pilot scheme covering 10-15% of Chinese generation capacity was expected to go live in the next 12 months.
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