Singapore — The traditional relationship between China's real GDP growth, expansion in electricity consumption, and coal demand is now broken, a phenomenon that began to emerge over 2012-2014, according to a new report by the US-based Institute for Energy Economics and Financial Analysis.
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Chinese power consumption over January-November 2014 ticked up by around 3.9% from the corresponding months of 2013, but thermal power production -- fueled by natural gas and coal -- declined 0.3% during the periods of comparison, based on government data, IEEFA analyst Tim Buckley wrote.
Hydroelectricity, followed by "other" sources of power generation accounted for the rise in power production to 4,975 TWh in January-November, from 4,788 TWh a year ago.
The annual growth in Chinese coal demand halved to 4-6% in 2012 and 2013 from around 10% over the decade to 2011.
In 2014, coal demand actually declined by 2.1%, the report noted.
"This is no small thing for global coal markets, and the implications are enormous," Buckley said. IEEFA has predicted that China's coal demand will permanently peak by 2016, if not earlier, and gradually decline thereafter.
Meanwhile, China's GDP growth in 2014 is expected to come in about the same 7.3% reported for the first nine months of the year, while its electricity demand, as seen in the latest numbers, rose by just 3.9% on year through November.
POWER DEMAND TO GDP GROWTH RATIO HALVED
"... The combined impact of energy-efficiency initiatives and structural economic changes toward less electricity-intensive industry sectors has reduced the ratio of electricity demand growth to GDP from above 1.0x over the past 13 years to 0.53x in 2014," Buckley said.
Morgan Stanley last August halved its outlook for China's electricity demand-to-GDP ratio from 2014 to 2016, forecasting that it will register at somewhere between 0.3 and 0.5x over the medium term, signaling a fundamental shift in the Chinese energy economy, the report said. IEEFA has forecast a ratio of 0.6x over 2014-2020, an estimate that it says may prove conservative, if anything.
Meanwhile, the rise in power consumption last year corresponded with a 9% decline in coal imports, reflecting a rapid loss of market share for coal in 2014 against all other sources of electricity generation across China -- wind, solar, hydro, nuclear, biomass and natural gas.
Average coal-fired utilization rates declined to about 56% in 2014 from an estimated 60% in 2011. "Given this excess capacity, new installations of coal power are expected to slow rapidly, and China could well see net annual coal-fired power capacity reductions from 2016 onwards," the IEEFA report said.
IEEFA sees coal's share of Chinese electricity production dropping to 72.5% in 2014 from the 78-79% average recorded in 2008-2011.
Two major policy moves by China in recent months -- cutting coal export tariffs to 3% from 10% starting January and a 6% import tariff on thermal coal except that sourced from Indonesia -- suggest a dramatic deterioration in the outlook for the global seaborne thermal coal market, the report said.
China was a net coal exporter before 2009, and could well reclaim that status later this decade, the report said.
Chinese press reports in December suggesting that Beijing is considering an end to approvals for new coal-to-gas and coal-to-oil projects as part of its next five-year plan for the industry would further erode the last main area of potential new growth for the country's domestic coal industry. The government's proposed massive CTG and CTO program would have needed an additional 300 million mt of coal production annually.
In line with the bearish outlook for China, global coal demand could peak by 2016, and structurally decline thereafter, the analysis concluded.