David Hargreaves on Energy, week 51 2013

Given we are in the grip of winter in the northern hemisphere, energy prices are not galloping north. Brent crude oil has far to go before WIM’s postulated $80/bbl. Uranium was moribund below $35/lb and thermal coal neither shaken nor stirred. The UK is at last warming to fracking and the International Energy Agency (IEA) blows hot and cold (mostly hot) on coal in its most recent report.

Coal provides close on 30% of all the world’s primary energy needs, second only to oil and c.35%. So despite its environmental detractors, it is here to stay. Also, says the IEA, it is here to grow. As ever, it is the fault of the Chinese. Reasons for coal’s dominant position include: it is abundant and geopolitically secure and coal fired plants are easily integrated into existing power systems. So it will meet more of the projected energy-demand growth than either oil or gas. We read that:

Global Coal Consumption grew from 7.53bnt in 2011 to 7.70Bnt (+2.3%) in 2012. This was the third lowest growth on record in the past decade.

China posted its second lowest growth in the period (+4.7%) to an estimated 3.68bnt or 48% of world total. This dwarfs the demands of both Russia and the USA in met and thermal coal.

US Coal Demand fell 98Mt to c.822Mt. A mild winter, low gas prices and plant retirements were all cited. The country’s export capability increased accordingly. Demand also increased in OECD Europe (+17Mt) and OECD Asia and Oceania (+12Mt).

Global Coal Supply increased c.7.83Mt (+223Mt) mostly from China (+130Mt) and Indonesia (+82Mt) but declined strongly (-71Mt) in the USA.

Demand says the IEA, will grow at 2.3% per year through 2018, down on the actual of +3.4% per year in 2007-2012.

Coal Conversion Projects (eg to gas, fuel liquids) will continue apace, particularly in China. If this becomes prevalent, it will affect forecasts for natural oil, gas and shale gas projects. The demand from China will continue, fed in part by conversion.

Importantly, coal demand in the developed, ie OECD economies will not decline, but flatten. India’s position in the world coal market remains an enigma. It has huge reserves although of suspect quality whilst the dominant miner, Coal India Ltd (CIL), is arguably the world’s largest producer. Still the country is not only an importer but actively seeks overseas investments in the sector. It has a list of ‘captive’ mines, only allowed to sell into the controlled power station market, which does not take all their output but they are not allowed to sell on the open market.

WIM says: India’s aspirations to compete with China are self-defeating in all bar population, where its c.1.20bn people will over take China’s 1.3bn ere long. Otherwise, its minerals policies, including gold imports and reliance on foreign energy, are in a shambles. To compound this, the largely government owned CIL is eyeing five proposals to acquire assets in Indonesia. It is also sniffing around Mozambique’s Tete Province and South Africa’s Limpopo.

Malawi, the small, landlocked central African country, has a lone coal mine, Mchenga, in the north which is looking for a strategic partner to increase output. The coal is of relatively low industrial quality but has both local and export market potential.

One man’s corn…. The US has had a bumper corn harvest, reflected in low current prices. Increasingly, the crop is used to make ethanol which in turn is blended into biofuel to satisfy the green lobby. Then there are dried distillers grains, DDGs, also produced at ethanol plants, where profits, noted at up to $0.70-1.00 per gallon, are noted.

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About David Hargreaves

David Hargreaves

David Hargreaves is a mining engineer with over forty years of senior experience in the industry. After qualifying in coal mining he worked in the iron ore mines of Quebec and Northwest Ontario before diversifying into other bulk minerals including bauxite. He was Head of Research for stockbrokers James Capel in London from 1974 to 1977 and voted Mining Analyst of the year on three successive occasions.

Since forming his own metals broking and research company in 1977, he has successfully promoted and been a director of several public companies. He currently writes “The Week in Mining”, an incisive review of world mining events, for stockbrokers WH Ireland. David’s research pays particular attention to steel via the iron ore and coal supply industries. He is a Chartered Mining Engineer, Fellow of the Geological Society and the Institute of Mining, Minerals and Materials, and a Member of the Royal Institution. His textbook, “The World Index of Resources and Population” accurately predicted the exponential rise in demand for steel industry products.