Politics Blog

Once bullish on coal’s prospects, research firm now sees signs of trouble

An energy-market research firm that has been optimistic about coal exports now says it has reasons to revise its coal outlook downward.

It’s unclear what mounting evidence of a weak international coal economy means for a proposed coal terminal for Cherry Point.

Wood Mackenzie won’t release its next report on coal exports until April, and it’s not really tipping its hand now. But in response to this blogger’s request for its latest opinion on the outlook of coal exports, Wood Mackenzie market analysts said pressures from different areas are combining to push coal imports down in China.

One WoodMac analyst’s opinion was published online by CoalGuru, a coal-news aggregation site.

The “binge” on investment in economic growth that led to a spike in Chinese coal imports in 2009 — and a corresponding price spike in 2010-11 — is over, according to WoodMac’s Cynthia Lim.

From CoalGuru:

WoodMac said that “Over the past two decades, commodity demand growth had maintained relatively proportionate annual increases to GDP growth. In 2014, however, the pace of power, gas, coal and diesel demand increase fell more drastically than the slight GDP moderation.”

The company now expects demand for power, coal and diesel to see their outlook change notably over the long-term due to major structural changes in the economy and policy: “The Chinese government is moving away from the post-2008 investment binge and gradually moving towards a more moderate but sustainable consumption-led economy,” said Ms Cynthia Lim, Principal Asia Economist for WoodMac.

In 2014, the article says, “commodity demand growth decoupled from GDP growth for the first time.”

This decoupling of growth in demand for coal (and other commodities) and GDP growth was given as evidence to a structural change in the economy. In the United States, the coal economy is also going through a structural change, according to Tom Sanzillo of the Institute for Energy Economics and Financial Analysis.

Speaking in November to a mostly anti-coal Bellingham audience, Sanzillo’s message essentially was that the coal industry and associated export facilities (i.e., Gateway Pacific Terminal proposed for Cherry Point) were not long for this world.

“U.S. coal ... is effectively in a state of market collapse,” Sanzillo told the audience invited by RE Sources for Sustainable Communities to hear him speak.

The details of his argument are outlined in my story of that November talk. From that story:

(Sanzillo) points out that while the stock market as a whole has been gaining value since 2011, an index of coal stocks has dropped precipitously. Something never seen before is happening to the U.S. coal economy, Sanzillo said. It doesn’t appear capable of recovering.

“Markets turn around, but we’re seeing a structural change, is what we’re thinking,” he said.

At that time, I talked to WoodMac’s Joe Aldina for balance:

Aldina said U.S. companies are in a bad position currently. Their coal is more expensive than coal exported to Asian markets from Indonesia, and the U.S. is a marginal player in the world market. However, his firm subscribes to a “rising tide lifts all boats” theory when it comes to coal.

A chart produced by Wood Mackenzie projects coal imports increasing threefold between now and 2035.

Wood Mackenzie’s analyst in November said Asian markets other than China would be major destinations for Powder River Basin coal — the Wyoming and Montana-based coal that would be shipped through Gateway Pacific Terminal. From my story from that time:

“Right now (PRB coal) already has strong demand, primarily from Korea, Taiwan — and there will certainly be more demand from Japan,” Aldina said.

China may not figure much in PRB exports, according to analysts. Little, if any, PRB coal heads there now, Aldina said, even though the country receives about 30 percent of all the world’s coal exports.

But given the “rising tide lifts all boats” theory, much of that rising tide depends on growth in Chinese demand, as that same WoodMac chart shows.

Where does WoodMac stand now on coal? To answer that, we could turn to Lim’s statements on CoalGuru, outlined and linked above.

I also asked Andy Roberts, director of global thermal coal markets. He responded in an email:

Cynthia’s analysis is just one of the elements underlying our emerging view of coal consumption in China. She points to the decoupling of coal demand from GDP in China, which has historically been a reliable indicator. This decoupling is being further impacted by multiple policy changes. The combination, then, will definitely cause us to lower our expectations for Chinese coal demand in the future. Still, coal will not and cannot be abandoned in China. But its historical growth pattern can certainly be slowed.

(Emphasis mine.)

Roberts gave a bullet-point list of policy impacts affecting coal in China:


Coal specification standards in coastal China

• Tightening coal specifications, including for trace elements, and stricter enforcement of same

• Export restrictions

• Direct market intervention to slow imports by domestic power plants

• Coal import taxes

• Export tax reduction

Roberts continues:

Still, the loss of demand does not necessarily translate to a one-for-one tonnage loss in imports. The regional (provincial) nature of the Chinese economy, the fact that infrastructure is lacking in some regions and the availability of alternatives to coal will all impact import levels. We are still sorting all this out and have plans to publish a summary of our new view in April. ... Domestic supplies of coal are large in the Chinese interior and, given weak infrastructure for delivery to coastal locations and given that demand is growing in the interior, there is continued room for imports in the coastal regions through the longer term. ... One of the reasons it takes us a little while to sort this out is that the Wood Mackenzie view, unlike many others, is fully integrated with detailed modeling for all fuels, not just coal and not only in China but worldwide. Putting this all together and making sure it’s completely integrated takes a good deal of time!

(Exclamation point his.)

The signals from global markets, all told, are not as clear to read as Lummi Nation’s direct opposition to the terminal, specifically its move last month to request immediate denial of a federal permit for Gateway Pacific Terminal. The U.S. Army Corps of Engineers responded by requesting more information, a response that terminal applicant SSA Marine took as rejecting the Lummi request to rule on the project’s disruption of Lummi fishing rights before completing a long environmental impact statement (EIS) due in about a year.

After I went live on Monday, Feb. 9, with a blog post about SSA Marine’s statement about the Corps’ letter to Lummi Nation, SSA spokesman Craig Cole got back to me again via email, to reiterate the company’s position that the EIS will — or maybe just should — be finished before the Corps decides on fishing impacts:

It is the project’s view that in any governmental deliberations the EIS process serves to inform decision-makers by producing the most detailed information on the relevant topics, including potential impacts, avoidances, and mitigations. Less than complete information would not serve the public interest. Nor can fully informed judgments about the merits of the project as to any given set of interests be arrived out at without a duly diligent investigation of potential impacts and opportunities. This is what the environmental impact statement is expected to provide.

I asked Patricia Graesser of the Corps to comment on the language in SSA Marine’s announcement, viz., that the federal agency had denied the Lummis’ request. Graesser did not respond in time for Monday’s blog post, but she get back to me afterward:

We haven't made a determination regarding potential impacts to the Lummi Nation's Usual & Accustomed fishing rights. While we continue evaluating information we have and seek additional details from the Lummi Nation, we are continuing with NEPA documentation (the environmental impact statement).

The NEPA process, Section 106 coordination, ESA consultation, and the Corps’ trust responsibility are separate and independent processes.

The language you have quoted below (the SSA Marine statement) is imprecise. We haven't declined the Tribe's request to deny a permit nor have we agreed to a request to deny a permit. We are evaluating potential impacts while continuing with NEPA review.