By Mungo Smith

The 32nd Coaltrans World Coal Conference was held at the Lutfi Kirdar Convention and Exhibition Center on the European shore of Istanbul, Turkey, October 14-16. The setting was impressive; overlooking a sparkling blue Bosporus reflecting a cloudless sky, the attendees gazed across at the shores of Asia, beyond which lie their hopes for the future growth of their business.

Coaltrans was visiting Istanbul for the first time since 1997 and found a country transformed. Turkey’s GDP growth over the past decade has been closer to that of China than to its European neighbors. Istanbul glistens with smart new cars, new hotels and glamorous shop fronts atop of the majestic ruins of former empires, and beyond which lies the ramshackle dwellings of massive urban sprawl testifying to the rapid demographic growth which has accompanied that of the economy. On the periphery of this vast city, Turkish industry is flexing its muscles all around the world. Turkey is Europe’s fourth largest economy and its second producer of iron and steel, and is expected to overtake German production by 2015. Domestic consumption is booming and, miraculously, Turkey seems so far to have escaped the economic gloom that prevails in Europe.

The producers, exporters, traders, transporters and buyers of coal attending Coaltrans 2012 felt reassured by what they saw. Here before their eyes they could witness a version of the Asian miracle that they hope will provide enough economic growth to keep their mines open, their ships sailing and their coal burning. For in many respects they are a beleaguered bunch; growth in the West has stagnated, prices for coal and shipping have fallen, their own governments are squeezing them with regulations and environmentalists maligning them, but the sunny and vibrant view over Istanbul encouraged optimism, and the forecasts of the conference’s numerous and notable speakers were generally upbeat.

The subjects under discussion were the global state of energy markets, growth in India’s steel market, new scenarios for power generation, the shifting dynamics of U.S. coal, and a look at the German and U.K. markets. Turkey’s industry was also examined and a session was devoted to coal transport and logistics. Two large conference halls were used, separated by about 40 booths inhabited by companies familiar to the industry, and countless areas for tea, coffee and networking were scattered all about.

Global Energy Markets
Going straight to the heart of the matter, Dr. Fatih Birol, chief economist at the International Energy Agency in Paris, set about the theme of the future of global energy generation. With Germany and Japan suddenly phasing out nuclear energy, North American shale gas usurping its rivals, regulations and renewables confounding expectations, and an erratic oil market, never has it been more difficult to make predictions for the future, as Dr. Birol bravely proceeded to do.

He expects global energy demand to grow by one-third by 2035, but there will be almost no increase in the developed world. Increased energy efficiency, stagnating economies and environmental pressures will ensure that consumption will remain static in the West. Emerging economies are expected to lead growth and China and India alone will account for half of future growth in demand. Here he introduced a theme that echoed throughout the duration of the conference; the names of China and India sounded throughout each session like a kind of mantra to encourage confidence for the future. China is set to become the largest oil importer by 2020 as the United States increases its production and reduces consumption. Chinese oil imports were 4.4 mbd in 2010 and Dr. Birol expects them to reach 12.3 mbd by 2035, meanwhile India will eventually overtake China as the first importer of coal.

The energy sector is experiencing unusually uncertain times. Energy policy, Dr. Birol laments, has taken second place to immediate economic concerns in the wake of the global economic crisis; carbon dioxide levels are at an all time high, the Durban agreements seem to have made no impact on investment, while Fukushima has placed a large question over the nuclear sector. Dr. Birol predicts that renewable and natural gas will account for almost two thirds of incremental energy demand between 2010 and 2035. This is in stark contrast to the past decade, during which coal accounted for nearly half of the increase in global energy use, with the bulk of the growth going into the power sector in emerging economies.

Emerging economies will remain the only drivers of growth. India’s coal production will fail to keep place with domestic demand, boosting imports from 61 Mtce in 2009 to 305 Mtce in 2035—by far the largest volume of any country. Elsewhere, “we are entering the golden age of gas” Dr. Birol declared. Shale gas he considers to be a revolution. At current low prices, further developments in shale gas production are unlikely, but if prices rise, “that would change the framework for competition for coal,” he said. “Combined unconventional gas output growth from North America, China and Australia could surpass that of all conventional producers.”

Renewables, Dr. Birol considers, also represent a major threat to coal, particularly due to government subsidies. But Dr, Birol concluded on a more optimistic note; 20% of the world’s population (1.5 billion people) has no access to electricity. These people will be connected to power and he predicts that 80% of their electricity needs will be satisfied using coal. India will lead this growth. “In a world full of uncertainty, one thing is sure: rising incomes and population will push energy needs higher,” said Dr. Birol, summarizing the creed that was then expounded by each speaker.

There was also, ironically, a bit of hope in the heart of Europe for coal exporters. Despite the persecution coal seems to attract in that area, European Union coal demand rose by 7% in 2011, benefitting from cheap U.S. imports. Erich Schmitz, managing director at Verein der Kohlenimporteure, gave a speech focusing on Germany, which has recently passed legislation that will close all nuclear power plants and hard coal mines in that country. While these energy sources are supposed to be replaced with renewable ones, the required infrastructure is far from complete. This, combined with high gas prices, favors imports of hard coal to meet the gap in demand. Similarly in the U.K., coal is currently more economical than gas and as a result is seeing increasing imports. It is generally expected that this trend will not continue into the long term as infrastructure developments catch up with regulations and legislation.

Growing U.S. Exports
Matt Schicke, managing director of Americas Coal Trading and Mercuria Energy trading, discussed how U.S. coal is shifting the dynamics of international trade. Over the past decade, both met and steam coal exports from the United States have been increasing at a steady rate, though steam is growing faster. As shale gas replaces coal in U.S. power generation, U.S. producers are actively pushing exports. Coal is becoming uncompetitive at home where Schicke believes that coal will be replaced as a base load and instead transition to peaking. Increased regulations in the U.S. have forced the retirement of many coal plants and older plants to not warrant the CAPEX required to meet environmental regulations and competition from gas. Exports are primarily aimed at Asia and the U.S. benefits from an installed export infrastructure as well as a variety of coal qualities for blending. He expects the U.S. to play a key role balancing the global market. The U.S. will shift from being a swing supplier on international markets to being one of the key suppliers to the global seaborne trade.

U.S. exports have doubled over the past six years and Deck Slone, senior vice president, strategy and public policy at Arch Coal, expects exports to more than double again over the next five years. “The U.S. will be one of the main suppliers of coal to the Atlantic basin and beyond because the coal is still there and other suppliers are facing major difficulties,” said Slone.

Slone pointed out that currently global macro uncertainty is affecting both thermal and met demand. Utilization rates at global steel mills stands at 76%—well off peak levels, and thermal and met coal prices have slid to unsustainable levels. As U.S. utilities switch from coal to gas, more tonnage becomes available for export, which is exacerbated by volumes of Colombian coal that had been previously intended for the U.S. market. However, he pointed out that world steel consumption is expected to climb by 40% by 2020 and the rapid build-out of the world’s coal-based power plants shows no sign of abating. Slone reckons that eventually demand will outstrip supply. Once again his analysis relies almost completely on rising demand in India and China, both of which have seen imports of both met and thermal coal rise over the past few years. China has changed from being a net exporter in 2006 to an importer of 174 million mtpy of met and thermal coal in 2011. India, however, is expected to become the largest net importer of coking coal, despite increases in domestic production and imported coal requirements will grow rapidly until at least 2017 because of the high ash levels (20%) of domestically mined coking coal. According to the chairman of the Steel Authority of India, CS Verma: “India has a 32 billion mt coal resource that is 13% of the global resource, but hard coking coal makes up only 16% of this total resource in India.”

India’s coking coal extraction capability is limited because the resource is often located under heavily populated areas that make access to it impossible and 20% of the resource is found at depths of more than 600 m. Steel production in India meanwhile has rocketed from 22 million mtpy in 2002 to 72 million mtpy in 2011 and is forecast to reach 150 million mtpy by 2017.

This brings opportunities for U.S. exporters. Australia will experience higher costs in new reserve areas due to government regulations and community impediments. Indonesian coal quality is declining while its domestic consumption increases and is facing major infrastructure bottlenecks which also affect Mongolia and Mozambique. Slone concludes that global seaborne demand will outpace supply in the next five years and predicts a cumulative net shortfall of 85 million mt for met coal and a 110 million mt deficit for thermal. The U.S. will be a beneficiary of this trend and its export capacity he expects to reach 245 million mt within five years. U.S. port expansions will more than double capacity during this time, particularly on the pacific coast.

Turkey
The host nation was also under discussion. Turkey’s GDP has been growing at an average of 5% per year for the past 10 years and the country has big potential for electricity consumption growth. While electricity consumption per capita is 3 MWh in Turkey, the EU average is 6.6 MWh. The additional installed capacity requirement is 4,000 mw per year and due to limited local sources, imported coal and gas will be required. Currently, local lignite accounts for 17% of Turkey’s electricity generation, while imported coal accounts for 10% (imported natural gas and hydro make up the most important elements). Turkey imports 30 million mt of solid fuel, but this number will increase. Average annual additional investment in imported coal fired power production is expected to be 75 mw which will result in an annual increase in import coal requirements of more than 2 million mtpy.

Current investments aim at increasing Turkey’s steel production to 55 million mt by 2015, which would make Turkey Europe’s largest producer. The most serious bottleneck to this ambition is the security and cost of fuel to be consumed. Most (90%) of the 6.5 million mtpy industrial consumption of coking coal is imported. Sabri Oral, chief executive of Turkey’s Coal Importers Association believes Turkey will be one of the fastest growing coal importers worldwide. Turkey is eager to diversify its supply and due to its geographical location, is reachable by almost all global coal resources. As all natural gas is imported, the Turks are eager to reduce dependence on it and are thus favoring development of domestic lignite production. To this end, this year a new law was passed permitting the privatization of lignite fields controlled by TKI (Turkish Coal Enterprise). Already the Soma field has been privatized. The country is also keen to attract investment in new thermal power plants, though according to Onder Kartal, a partner at Jupiter Trading, major obstacles stand in the way. These include difficulties in getting Environmental Impact Assessments, excessive red tape, high CAPEX requirements, uncertainties concerning the liberation of the market and carbon emissions costs as well as general public antipathy toward coal. Nevertheless, the short term outlook for coal consumption in Turkey is bullish and imports are set to rise significantly.

 

Conclusion
The general tone of both speakers and attendees was one of optimism. Going forward, a great deal of volatility is expected as periodic recessionary episodes may cause short-term oversupply and increase price volatility, but this will not alter the long-term growth story. While forecasts varied, there was a general assumption that for the next 20 years, volumes of seaborne coal will grow substantially, driven in particular by the demographic and economic expansion of China and India. Electrification of communities that are not served by the grid as well as general improvements of living standards in these countries are expected to be the drivers of growth. The clouds beyond the horizon did not sully the sunny sky above the Bosporus, but the IMF has been muttering about a new global recession and the possibility of a financial crisis in India. The Chinese and Indians may become tired of living under clouds of dirty smog; Asia does not yet have an efficient carbon policy and emission reduction programs are less developed. If the Chinese climate control policies are enforced, the impact for the seaborne coal trade would be severe. Consumers tired of volatility are integrating their supply chains so that India’s steel giants are mining for their own coal in foreign climes. It is thus not certain that these massive countries can live up to the ambitions expectations voiced at this assembly. The focus of the conference never drifted from the potential that is China and India, but it seemed ominous that for all of the enthusiasm, only one single Chinese man attended the conference.

About the Author
Based in Istanbul, Mungo Smith manages Global Business Reports’ editorial team, which works in alliance with Coal Age’s sister publication Engineering & Mining Journal (E&MJ). www.gbreports.com