January 31, 2022
Australia dominates metallurgical coal with 54% market share of trade while Thermal coal commands 20% market share. Overall Coal is very important to Australia’s economy as coal is Australia’s second largest export industry, earning $55 billion of revenue in FY2020 and Coal royalty payments to the state governments of Queensland and New South Wales contributed a record $6.3 billion in FY2019. The coal industry also directly employs more than 38,000 people with a further 120,000 indirect jobs supported by the industry
Rather than global consumption, demand for Australian coal is dependent on seaborne-traded markets which are increasingly concentrated in Asia. Although metallurgical and thermal coal are similar in terms of the method of extraction and preparation, the differing properties of the two coal types mean that there are distinct markets and, therefore, drivers of future demand.
If we analyse the demand for Metallurgical coal, it is expected remain healthy in the future led by demand from India who are dependent on imports. Driven by urbanisation and associated infrastructure development, the opportunity remains for India and South-East Asian nations to increase steel usage, as measured per capita. For metallurgical coal, steel-intensive growth in India is expected to be the single largest driver of seaborne trade demand over the coming decades.
After surpassing annual production of more than 100 million tonnes for the first time in 2017, India’s crude steel production was 111 million tonnes in 2019. This growth in Crude steel production which has grown by 5.5% per annum in India over the past decade is driving demand for metallurgical coal
In fact, The Indian Government’s National Steel Policy (2017) projects annual crude steel production to reach 255 million tonnes by 2030. Faced with a structural deficiency of high-quality metallurgical coal, India turns to the seaborne market to meet demand Australia has a structural advantage with supplying the coal to India as it has the lowest average transportation and port costs compared to other major seaborne metallurgical coal export nations. This advantage is underpinned by the shorter distances between mines and ports, as well as significant port and rail capacity to exclusively service coal exports.
Looking forward unless the cost of renewable hydrogen falls to below US$2.2/kg (currently $3.2 to $8) and cost of metallurgical coal is above $310/t (currently $139) metallurgical coal does not have an economic alternative. The metallurgical coal-dependent blast furnace-basic oxygen furnace (BF-BOF) method commands 72% of global crude steel production.
This share is unchanged from a decade earlier (2009: 71%) and is 14 percentage points higher than at the start of the century (2001 – 54%). Steel production via the electric arc furnace (EAF) method draws upon direct reduced iron (DRI) or recycled (scrap) steel and uses less (or nil) metallurgical coal.
Globally, steel production based on recycled steel is expected to increase share in future decades (2019 share: 28%) but is limited by the availability of scrap material. Of the total global steel production in the last 120 years, over a quarter has been produced within the last decade and the average life for steel products is approximately 40 years.
Considered a long-term alternative, green hydrogen-based steel production, either as an alternative injection material to PCI50 or as a reductant to produce DRI, is not yet operating on a commercial scale. Cost competitiveness and the requisite infrastructure are challenges for the emergent technology. Bloomberg projects that hydrogen-based steel production could be cost-competitive (in Europe) from 2030, which is in a scenario where the coking coal price is US$310/t and the cost of renewable hydrogen falls below US$2.20/kg.
With average age of coal fired power plants at much lower age then economic life and no viable economic alternatives Australian thermal coal will also continue to be in demand going forward. For thermal coal, 99% of Australian exports are destined for Asia, a region that now commands 81% of the seaborne trade increasing from just 35% in 1990. In fact, Australian thermal coal export volume to South-East Asia was 25 million tonnes in FY2020, more than double the volume from just five years prior. It is this region (rather than global consumption) that is projected to use coal-fired generation assets for a prolonged period, in addition to increased renewables and other energy sources.
Compared with a typical economic life of 40 years, the average age of operating coal-fired generation capacity across the largest thermal coal import nations is relatively young. While renewables and other cleaner energy sources will undoubtedly grow in significance, the age of the Asian coal-fired energy generation fleet provides insight into the continuing demand from operating assets. Furthermore, On average, Australia’s export thermal coal has the highest energy content and relatively low ash content, when compared to most other major sources of seaborne thermal coal. This environmental advantage results in lower emissions when consumed and/or lower tonnages needing to be mined.
