Aussie coal companies feel the squeeze from China’s diminishing demand growth

Just one day after a new Oxford University study predicted tough times ahead for Australia’s coal exports to China, the International Energy Agency (IEA) released its annual Medium-Term Coal Market report, corroborating many of the study’s future scenarios.

According to the new report, Chinese policies meant to reduce the country’s coal dependence will push down demand growth over the next five years. Although China alone is expected to account for around 60% of all new demand worldwide, new forecasts put average annual growth at 2.3% per year through 2018, instead of the previously predicted 2.8%.

For Australian coal companies, that downward revision spells pinched profits. China accounts for one-fifth of Australia’s coal exports, with companies like BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO), Whitehaven Coal (ASX: WHC) and New Hope Corporation (ASX: NHC) relying on China for a major portion of their sales.

With 15% of Aussie coal already being extracted at a loss, lower demand could push this number higher. And while current mines may manage, around $50 billion of new coal projects could be suspended or abandoned if current trends keep up.

However, the IEA made sure to stress that coal demand will not disappear overnight. “Like it or not, coal is here to stay for a long time to come,” noted executive director Maria van der Hoeven at the report’s unveiling. “Coal is abundant and geopolitically secure, and coal-fired plants are easily integrated into existing power systems. With advantages like these, it is easy to see why coal demand continues to grow. But it is equally important to emphasise that coal in its current form is simply unsustainable.”

Ms. van der Hoeven also pointed to new technologies as potentially increasing coal demand. Coal gasification is expected to contribute more to China’s gas supply than shale gas over the next half-decade, and this process could potentially keep coal on the energy table long after its previous generation techniques are deemed obsolete.

Foolish takeaway

No country needs coal. Every country needs energy. As these latest reports show, it’s important for energy investors to remember that the second statement rules supreme. Coal may be a growing energy source for China, but the country will ultimately choose whatever fuel gives it the best balance of cost, political security, and environmental benefit. Smart investors will diversify their own investments, choosing a balanced portfolio that reflects a variety of alternative futures.

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Motley Fool contributor Justin Loiseau has no position in any stocks mentioned in this article. You can follow him on Twitter @TMFJLo.


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