Metals and Mining - Coal
SECTION 1: METALS AND MINING – COAL OVERVIEW
BUSINESS SENSE ABSTRACT
As of 2022, coal provided 26.7% of the global primary energy supply, reaching a new record of 8.3 billion tons in consumption. With an annual growth of 14.5% from 2018-2023, the global coal market boasted a revenue of USD 2 trillion in 2022. While coal demand in the United States and the European Union fell sharply by 24% and 16%, respectively, in 2022, the Asia Pacific region remains the largest consumers of coal with China and India accounting for almost 70% of the global share. In the same year, China and India produced around 53% and 9% of the global coal production, respectively. In September 2023, coal price reached an all-time high of USD 443 per ton. Still, due to the ongoing energy transition, global coal mining revenue is expected to decrease at a CAGR of 4.1% to USD 1.6 trillion by 2028, with profit estimated to drop to 12.1%.
SIGNIFICANCE
As a cornerstone electricity generator in some of the world’s largest nations, including China and India, coal remains the largest source of CO2 emissions from energy. While the global consensus is on reducing coal usage, projections still estimate that global reliance on coal will be stable around 7000-8000Mt annually until 2025. Furthermore, the World Bank estimates that coal mining employs 4.7 million people globally and closing coal mines can destabilize some labor markets as well as economies around the world. This makes coal a transient topic to understand in the context of economic and environmental implications of the ongoing energy transition.
Projections still estimate that global reliance on coal will be stable around 7000-8000Mt annually until 2025.
CASE STUDY TOPICS
Case study topics for coal include: transitioning coal-dependent regions, clean coal technologies, coal phase-out policies, social and environmental impacts of coal mining, renewable energy integration in coal-dependent regions, economic and labor market effects of coal decline, coal industry and global energy markets, investment trends in the coal sector, and government incentives for coal transition.
KEY TRENDS & EVENTS
Restructuring in China: China's National Development and Reform Commission is reorganizing the coal industry to create large coal conglomerates and reduce fragmentation. This consolidation aims to attract international capital through state-owned holding companies. China has already closed down tens of thousands of small coal mines over the past decade, underscoring its commitment to this restructuring effort.
Regionalization in coal production: In the context of regional coal export dynamics, the United States dominates North America's thermal coal production, primarily serving its electricity generation sector. Canada contributes to the North American market by exporting half of its coal production, primarily to Asia. Meanwhile, Australia is the primary bulk exporter of coal in Oceania, being a major global producer and net exporter, while India holds a dominant position in the India and Central Asia region, meeting a significant portion of its energy and electricity generation needs through coal, despite its reliance on imports for coking coal due to limited local reserves.
Chinese ban on Australian coal: China has lifted its trade restrictions on Australian coal, allowing all domestic companies to import coal from Australia. The ban, first imposed in late 2020, was partially eased in early January 2023 for state-backed importers. Quality coal is in high demand in China for steelmaking and power plants, with imports expected to surge following the lifting of restrictions. However, Chinese demand for Australian coking coal, used in steelmaking, remains low due to cheaper supplies from local mines, primarily in Mongolia and Russia. Before the restrictions, China was a significant buyer of Australian coking coal, accounting for around 40% of its total imports.
Geopolitics and conflicts: Upon the Ukraine crisis, Europe's decreased Russian coal imports were offset by surges in shipments from Colombia and South Africa, with South Africa seeing a nearly six-fold boost. Meanwhile, U.S. exports remained relatively steady in 2022, though some were redirected to Europe. Russian exports, while up overall, shifted toward China and India after the EU banned Russian coal in Q3 2022. Russian thermal coal exports decreased approximately 10% to 157 Mt in 2022. Furthermore, Indonesian coal exports in 2022 surged by 14% to reach a record high despite experiencing two temporary export bans.
Green initiatives: Several European countries, including Germany, the United Kingdom, Italy, and Spain, are significant importers of both coking and thermal coal. In 2023, as the global demand for cleaner energy increases, North America's share of global coal imports remains below 5.0%. However, it's important to note that the United States and Canada still play substantial roles as importers of thermal coal within the region.
Underwhelming investment: The outlook for investment in coal was projected to fall by 20% in 2022. Australia occupies a significant share of the new coal project pipelines, ensuring a new supply of coal into the market. However, analysts warn that mine cash flow is directed to repay debt or reward shareholders rather than new investments.
INFLUENCES & HEADWINDS
Steel production: The steel production demand determines the overall demand for coking coal which influences the global coal mining performances.
Steaming coal for electricity production: Coal companies predominantly mine steaming coal that is used for generating electricity.
Iron ore: Iron ore, along with coking coal, plays a crucial role in steel production, creating an interdependence between their global market prices. When iron ore prices rise, demand for both iron ore and coking coal tends to decline.
Gas: The shale revolution in the United States led to a significant shift in the energy landscape, with natural gas emerging as a strong rival to coal due to its affordability. Over the course of a decade, coal's share of power generation in the US plummeted from 45% in 2009 to just 24% in 2019, while natural gas's share rose from 23% to 38%.
Climate policies: Upon the Paris Agreement, many G20 countries pledged to be carbon neutral by mid-century, with public opposition to coal and other fossil fuels increasing and impacting policies.
CASE STUDY
Weather and coal mining: In 2022, Australia experienced a third consecutive La Niña event, resulting in heavy rains that caused significant disruptions in the coal mining industry. Floods in Queensland led to the suspension of operations at the Baralaba North Coal Mine, leaving workers unpaid and prompting union concerns. In the NSW Hunter Valley, heavy rain in July 2022 forced the closure of a crucial rail network connecting numerous coal mines to the Port of Newcastle, leading to suspended coal export services and price increases. Additionally, heavy rain poses logistical challenges such as coal spillage during loading onto ships and increased transportation costs due to the weight of wet coal.
Coal supply chain
SECTION 2: COAL INDUSTRY FINANCIALS AND METRICS
REVENUE DRIVERS
For governments
Royalties and Taxes: Governments often collect royalties and taxes from coal mining companies based on production volumes or sales, contributing to government revenue.
Licensing and Permit Fees: Fees associated with granting mining licenses and permits can generate revenue.
Environmental Compliance Fines: Regulatory fines for non-compliance with environmental standards can add to government revenue.
For mining companies and related industries
Coal Sales: The primary source of revenue for mining companies is the sale of coal to power plants, industrial facilities, and other consumers.
Export Markets: Exporting coal to international markets can significantly boost revenue for coal companies, especially in regions with strong demand.
Technology and Efficiency Improvements: Investing in advanced mining technologies and equipment can increase production efficiency and, consequently, revenue.
Diversification: Diversifying into related industries such as power generation or renewable energy can provide additional revenue streams.
Joint Ventures and Partnerships: Collaborating with other companies in the energy sector can lead to shared revenue opportunities.
For traders and others
Coal Trading: Traders buy coal from mining companies and sell it to various end-users, earning a margin on each transaction.
Logistics and Transportation: Companies involved in transporting coal via railways, ships, or trucks generate revenue through transportation fees.
Equipment Suppliers: Manufacturers and suppliers of mining equipment, machinery, and safety gear benefit from coal mining activities.
Financial Services: Banks and financial institutions offer loans, credit, and financial services to coal mining companies, earning interest and fees.
Environmental Solutions: Companies offering environmental mitigation and reclamation services can generate revenue by helping mining companies meet regulatory requirements.
COST DRIVERS (for mining companies to extract / price influences)
Geological Conditions:
Coal Seam Depth: Deeper coal seams require more extensive and expensive mining operations.
Seam Thickness: Thicker seams are generally more cost-effective to mine than thin ones.
Mining Methods:
Choice of Mining Method: The selection of mining methods, such as underground mining (e.g., longwall or room and pillar) or surface mining (e.g., open-pit or mountaintop removal), significantly impacts costs.
Labor Intensity: Labor costs are a significant factor, and the choice of mining method can affect the number of workers required.
Energy Costs:
Energy for Mining Operations: Energy is needed for various aspects of mining, including machinery operation, ventilation, and transportation.
Fuel Costs: The cost of fuel for vehicles and machinery can be a substantial expense.
Regulatory Compliance:
Environmental Compliance: Costs associated with meeting environmental regulations, such as reclamation and land remediation, can be significant.
Safety Standards: Ensuring workplace safety and compliance with safety regulations adds to operational costs.
Infrastructure and Transportation:
Transportation Costs: The cost of transporting coal from the mine to the end-user, including infrastructure maintenance and logistics, is a significant factor.
Infrastructure Development: Investment in roads, railways, and ports can impact the cost of coal transportation.
KEY TERMINOLOGIES & METRICS
Coal Classification:
Coal is classified into four main types or ranks: anthracite, bituminous, subbituminous, and lignite. The rank depends on the types and amounts of carbon in the coal and its heat-producing capacity.
Anthracite:
Contains 86%–97% carbon.
Has the highest heating value among coal ranks.
Mainly used by the metals industry.
Bituminous Coal:
Contains 45%–86% carbon.
Used for electricity generation and in the iron and steel industry.
Subbituminous Coal:
Contains 35%–45% carbon and has a lower heating value than bituminous coal.
Lignite:
Contains 25%–35% carbon and has the lowest energy content.
Relatively young deposits not subjected to extreme heat or pressure.
Used primarily for electricity generation, with some conversion to synthetic natural gas in North Dakota for use in pipelines.
Other key terminologies:
Seam: A seam in coal mining refers to a distinct layer or bed of coal within a geological formation. It's the coal deposit that miners work to extract.
Longwall Mining: Longwall mining is a highly efficient underground mining method used to extract coal. It involves the use of a shearing machine that moves back and forth along the coal seam to remove large blocks of coal.
Overburden: Overburden refers to the layer of soil, rock, and other materials that lies above a coal seam. It must be removed or excavated before coal mining can take place.
Reclamation: Reclamation is the process of restoring land and ecosystems affected by coal mining to their natural or beneficial state after mining operations have concluded. It includes activities like regrading, re-vegetation, and water management.
Wash Plant: A wash plant is a facility used in coal processing to separate impurities and unwanted materials from raw coal. It typically involves processes such as washing, crushing, and sorting to prepare the coal for market.
SECTION 3: COAL INDUSTRY P&L REVIEW
GLOBAL COAL CONSUMPTION (2021-2023)
GLOBAL COAL PRODUCTION (1990-2022)
Disclaimer: The contents of the following report are provided solely for reference purposes and should not be construed as providing any form of advice or recommendation. This report is not intended to substitute or replace any official documentation. For comprehensive and authoritative information, it is recommended that you consult the official reports issued by the respective companies.
China Shenhua Energy 2022 and 2021 P&L Review
Coal Segment Results
P&L Review questions for the reader:
Can you derive any correlation between the global coal consumption & supply and the China Shenhua Energy company coal segment results?
What conclusions can be drawn from the China Shenhua Energy company coal segment results in light of the coal industry updates in the vertical report?
SECTION 4: VIDEO REFERENCES
For your further understanding of the global coal industry, we recommend the following videos:
“How coal made us rich – and why it needs to go” | DW PlanetA
“Coal demand is soaring, but insurance for it isn’t” | Reuters
Sources:Ibis World Industry at a GlanceWorld Bank: Global Perspective on Coal Jobs and Managing Labor Transition Out of CoalWoodmac: The Future of CoalU.S. Energy Information Administration: Energy ExplainedWorld Economic Forum: Coal demand has seen its biggest drop since World War II. But it’s not all good news
