Policymakers should plan for decline in coal exports to avoid chaotic transition
The nation’s coal export levels will be decided by Asian energy policies, not those of SA
While SA grapples with domestic power and coal issues, the government would do well to keep one eye on the overseas markets for the nation’s coal exports.
In the longer term SA’s coal exports will decline as overseas demand for the product fades. Without intervention to support coal areas in managing the transition it will cause social and economic fallout.
The coming global decline in coal demand is part of a transition towards renewable energy that is already well under way. At heart it is a technology transition and is hence unavoidable — it will happen whether policymakers want it to or not.
Policymakers need to plan for this long-term decline. An unplanned, chaotic transition will have far more serious effects than one that has been prepared for.
As tends to happen in technological transitions, new technology will replace the old at a rate faster than most predict.
According to Bloomberg New Energy Finance, two-thirds of the world’s population already live in countries where wind or solar, or both, are the cheapest source of new power generation. By 2030 new wind and solar will be cheaper than running existing coal- or gas-fired plants virtually everywhere. It is already the case in India.
This is particularly meaningful for SA as it is so dependent on India as a coal export destination. In 2018, 48% of all SA exports out of Richards Bay Coal Terminal (RBCT) went to India, a nation with a clearly stated policy aim to reduce reliance on coal imports. In the first half of 2019 that rose to 60%.
Other big thermal coal exporters depend less on one nation; in 2018, 31% of Indonesian exports went to China and 27% to India, while Australia’s biggest destination was Japan at 39%.
Given that SA and Indonesia are so reliant on India, any reduction in the latter’s coal imports would have important repercussions across the seaborne thermal coal market.
The Indian government’s latest plan is to cut coal imports by a third, about 85Mt, by 2024.
In addition, state-owned Coal India is again talking about ramping up domestic coal production to reduce imports. Though Coal India has tended to miss its production growth targets, its output is still growing and is planned to grow much more.
Don’t expect other markets to save SA’s coal exports either. Export growth to Pakistan is limited, with most of the power plants that run on imported coal already built and a significantly stepped-up renewable energy policy having been drafted.
South Korea has a clearly stated intention to reduce reliance on coal, while Europe is further down that track than anyone. The Institute for Energy Economics and Financial Analysis expects government statements announcing a planned end to coal-fired power in some European countries will be joined by others globally in the near future.
SA’s hand will be further weakened by the fact that other exporters will be losing their big markets at the same time.
While the world’s demand for our coal is beyond our control, our ability to invest in new sources of growth and innovation is notPort of Newcastle
In addition to India, Indonesian exporters are faced with the prospect of declining exports to China as it too aims to replace imported coal with domestic production. Some of the slack may be taken up by higher domestic coal demand in Indonesia but the market looks as if it will extend its oversupply situation into the longer term.
Meanwhile, Australian exporters will cause Japanese demand to fall even if the Japanese government takes no further action to reduce reliance on coal. The result of this will be oversupplied coal exporters competing more fiercely over declining export markets.
SA’s main export terminal, RBCT, is already operating with 20% spare capacity as rail capacity hasn’t matched the terminal’s 91Mt a year export capacity.
In the longer term the terminal may have to get used to the idea that an increasing proportion of its annual capacity will become stranded. It is not alone in this. The coal terminals at the Port of Newcastle in Australia — the world’s largest coal export port — operated at 25% capacity in 2018.
Concern over coal’s long-term sustainability has led the chair of the Port of Newcastle to recognise an “urgent need” for the port to diversify away from a reliance on coal, further stating: “While the world’s demand for our coal is beyond our control, our ability to invest in new sources of growth and innovation is not.”
Part of that statement was echoed by RBCT chair Nosipho Siwisa-Damasane on the release of reduced 2018 export figures, who stated: “The markets are a reality, they are outside RBCT’s control.”
In the long term, SA coal export levels will be decided by markets that reflect energy policies across Asia, not those of SA. The economic benefits of renewable energy are increasingly influencing Asian energy policies. Concern about climate risk and air pollution will only drive the change faster.
Policymakers need to spend time and effort now to prepare for the inevitable transition.
• Nicholas is an energy finance analyst with the Institute for Energy Economics and Financial Analysis.