If that sounds like irrational optimism in the face to overwhelming evidence of a glutted market and low prices, then you need to consider the evidence which is all positive – over the long-term at least.
Two items are offered as proof of China using a proposed 3% tariff on coking coal and a 6% tariff on thermal coal as bargaining chips in a contest which is being played on multiple levels.
Firstly, it became apparent within hours of the tariff threat that the extra taxes were linked to a free trade agreement (FTA) being negotiated between China and Australia.
In other words, the Chinese thought it would be fun to try and push Australia into being more generous in the terms of the FTA and what better way to do that than threaten to damage coal exports, one of Australia’s biggest industries.
The fact that the threatened coal tariff quickly faded into the background was all the proof that The Hog needed to support his belief that it was a negotiating tactic in the final days of haggling over the FTA which is scheduled to be signed next month.
Secondly, a fresh study of Asian energy demand highlighted the fact that the entire region and its three billion people are starved of reliable, long-term, reasonably-priced energy and that the winner from that situation over the next 10 years will be coal.
If you’ve heard that before there’s a reason. It’s true.
But, to really understand what it means you need to digest some of the findings in a major study by Macquarie Bank’s research team which headlined their key finding about Asian energy as “short and getting shorter”
Translated from banker-speak what short and getting shorter means is that Asia is highly unlikely to be unable to meet the needs of its fast growing, and increasingly wealthy population, without massive energy imports.
Top of that import list, according to Macquarie is coal.
A few numbers and observations from the bank’s whopping (138-page) analysis of Asian energy explain why The Hog has been quick to dismiss China’s coal tariff as a negotiating manoeuvre rather than a genuine threat, and why coal producers will emerge long-term winners after their current problems pass.
According to Macquarie between now and the year 2025 Asia’s primary energy demand will rise by 37%, but more importantly its energy imports will rise by 53%.
Given that the region is starting at a high level of energy consumption thanks to the rise-and-rise of Japan, Korea and China, that 53% increase in energy imports is the equivalent to the output from 436 nuclear power stations, according to Macquarie.
“Asia will be increasingly energy tight,” the bank said, “and we expect regional energy prices to thus rise over the next decade.”
That big picture from Macquarie needs to be broken down because some people might imagine that the ongoing surge in Asian energy demand will in some way trigger a change in the energy mix with nuclear, renewables and natural gas meeting the higher levels of demand.
Not so, and in that comment lies the good news for coal because the bank adds that: “Coal consumption will grow despite pollution concerns.”
Which leaves open the question of how much will coal consumption grow and that’s when a modest reality check is required because what’s likely to happen is that the coal’s stranglehold on Asian energy will be loosened – but not by much.
Macquarie reckons that over the next decade coal’s share of total Asian energy consumption will drop from its current 67% to around 60% with the “lost” 7% being shared by gas, nuclear, hydroelectricity and other renewables.
Yet, while coal might see its share of the total market decline it will have 60% of a much bigger market which will translate into an increase in sales.
“Coal stays king” is one of Macquarie’s snappy explanations for what lies ahead, adding that: “While there is much talk of reducing dependence on coal, and this is often interpreted to imply that coal consumption will stall, or even fall, this is a fantasy in our view.”
“The energy balance numbers come nowhere near to working unless a large increase in production of still plentiful coal reserves is assumed – and even then we still see Asia becoming increasingly short of energy. That is the brutal reality in Asia.”