Coal has dominated fuel choices in Asia since 2010, even in gas-centric Southeast Asian countries, and many forecasts assume that coal will remain the region’s most economical option. But lower natural gas prices and individual market conditions are putting a dent in coal’s future in the region, some experts note.
According to Graham Tyler, Wood Mackenzie’s research director for Asia gas and power, one reason that the trend is curious is that Asia hasn’t experienced as much gas-coal competition as the U.S. and Europe. “Spot [liquefied natural gas] prices have fallen to around US$7 per million British thermal units (MMBtu) in recent months and we do not forecast any sustained price recovery above US$10/MMBtu with over a 100 million tonnes per annum (Mtpa) of new LNG expected to be operational by 2020,” he said in March. The expected supply glut could create an environment where coal-versus-gas competition in Asia is “a real possibility,” he said. Another factor is that Asia’s near-term gas demand growth is slowing, primarily due to weaker economic growth and structural changes in China, the region’s key market, he noted.
Prakash Sharma, Wood Mackenzie’s research director for Asia coal markets agreed, pointing to coal prices that have likely hit bottom. “Benchmark thermal coal prices in the seaborne market are trading below the marginal cost of supply for many producers, and therefore are unlikely to fall significantly lower in the future,” he said. That means that coal prices are sitting at multi-year lows due to several factors. Among them, again, is that demand has weakened in China. “Delivered thermal coal prices have fallen from a peak of around US$110 per tonne (US$/t) in 2012 to below US$80/t in recent months already and historically, coal prices only fluctuated within a narrow band of US$2-4/MMBtu,” he said.
The analysts noted that Asia is a diverse market characterized by differing levels of economic development, fuel resources, market structures, and government policies, and that environmental initiatives and individual market influencers will determine the points at which the scales will tip in favor to gas.
“South Korea reflects a mature economy with an energy market dependent on imported fuels, and therefore has relatively high fuel costs. It has also introduced a carbon cap and trade scheme in January, which will favour gas due to its lower carbon content and thus lower related carbon costs,” Tyler explained. “Whereas in China, air quality is a key issue and gas-fired power generation is subsidized in some provinces. China is also introducing a national carbon trading scheme; and other markets are also implementing or looking at carbon initiatives. These factors all make gas the more attractive option.”
The gas-coal competition is already affecting some projects. In Malaysia, for example, which is oversupplied with pipeline gas—a situation that could continue until 2020, the analysts said—coal projects under construction are seeing delays (Figure 1).
—Sonal Patel, associate editor