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Imported coal alone cannot guarantee security of supply: the facts behind the debate


In the current coal-policy debate it is repeatedly claimed that coal’s contribution to security of energy supply could quite easily be based on imported coal alone. In the case of oil and gas there is now a general realization that the high and increasing dependence on imports is fraught with substantial price and supply risks.

Conveyor belt carrying coal

This situation could in turn have serious and negative economic and social consequences, as well as grave ecological implications – one only has to think of the wreck of the oil tanker Prestige off the Spanish coast. Yet when it comes to the world coal trade the view still often prevails that this is a stable market that has operated efficiently for many years, that reserves are amply distributed around the world and that supplies come mainly from politically stable countries. Any temporary interruptions to supply could therefore simply be offset by a policy of more intensive stockpiling. In its latest Germany 2002 Review, which was published in December of that year, the International Energy Agency (IEA) takes the same position and uses this argument to recommend the phasing-out of subsidies to the domestic coal industry (1) (see references at the end of the paper).

However, such an assessment of the situation is over-simplistic. Certainly the world coal market has operated effectively for many years and has enjoyed a high level of price stability, even though a number of sectors have experienced difficulties. But it is simply incorrect to refer to the world coal market as if it were a single entity.

It is also accurate to say that world coal reserves and world coal production are not centred around politically unstable regions in the same way as oil and gas, although it has to be remembered that only three countries account for more than 60% of the world’s hard-coal production (USA, China and India) and hard-coal reserves (USA, China and Australia) (2). This concentration of production and reserves is in fact more pronounced than that found in the oil, gas and uranium-mining industries (3).

The decisive question, however, is whether security of coal supply would exist if there were complete dependence on solid-fuel imports – and what level of security would this mean. It is obvious that political unrest and conflict, terrorism and even war can also affect the international coal market, or rather its production, loading/shipping and transport capacities. All products that are traded internationally – and this includes coal – involve supplier and country risks for German customers and consumers that are difficult to quantify and cannot be controlled by German policy-makers.

These country-related risks also limit the quantity of overseas coal mined by German companies (for example in the USA, Venezuela and Australia), which is generally not destined for the German market. In addition to these political uncertainties a number of specific economic risks connected with German and European demands on the supply capacities of the world coal market are also likely to arise within the foreseeable future:

• Unlike oil and gas, only a small faction (currently about 17%) of world coal production is traded internationally. This means that more than 80% of world output is consumed by the producing countries themselves. By 2020, according to the US Department of Energy, the level of trade on the world coal market will have fallen to about 12%, despite a slight increase in turnover; this means that producing countries will be retaining an even larger share of output for their own consumption. As a result there will be a relative decline in the amounts available to the international market, in other words the quantity of fuel available to meet the needs of other countries.

In its study the Federal Institute for Geosciences and Natural Resources (BGR) distinguishes between ‘hard coal’ (essentially bituminous coal) and ‘soft lignite’, which is less abundantly available. The BGR’s findings on world hard-coal resources, i.e. geological (in situ) deposits that can be extracted using current technology but are not economically recoverable at present, differ somewhat in that more than 60% of world resources are said to be concentrated in Russia.

  • All those countries and regions that do not have sufficient coal reserves of their own, or that have abandoned the mining of these deposits (such as Japan or, more recently, France), or that are cutting back on the use of such fuels (as almost every EU member country has done) must now be counted as consumers on the international coal market. Even today European coal imports, which account for barely 30% of world coal trade, are being exposed to increasing demand-driven competition from the Asian markets, the latter now absorbing 54% of the overseas trade in coal (4). While the largest rise in demand is coming primarily from Japan and the countries of south-east Asia, substantial increases in imports are also expected from China and India, which in spite of their own enormous coal reserves have to satisfy the needs of a vigorously-growing domestic demand for energy.
  • Furthermore, the deregulation and de-monopolisation of the European electricity markets (the largest coal consumption sector in the EU) has also resulted in a fragmentation in demand, which will now be driven by a large number of independently-acting companies, and consequently has meant a significant loss in purchasing muscle on the international coal market.
  • More than 80% of the traded world market supply of coal is now concentrated on only five regions (and according to current forecasts will remain so for years to come): Australia, China, South Africa, Indonesia and North America (USA + Canada).
  • Australia, which alone supplies almost one third of the world’s coal exports, is geared to supply the Asian-Pacific markets, which it considers to be more lucrative than those of Europe.
  • China’s exports contrast with a high and growing level of imports; for this reason there are doubts as to China’s future role as a net exporter on the world market.
  • South Africa, which continues to be plagued by serious domestic problems, remains the most important supplier of coal to the German market (along with Poland, which intends to cut back drastically on its exports – most of which do not break even – as part of a national programme of restructuring and in view of the country’s forthcoming accession to the EU).
  • Indonesia can hardly be regarded an example of political stability.
  • US exports have been on the decline for a number of years, as the country has been focusing primarily on internal demand (and has traditionally played the role of a “swing exporter”), with self-supply from the domestic coal industry set to increase considerably in the years ahead.
    • Companies operating on the supply side of the world coal market are also showing a strong tendency towards concentration. In 2001 the ten largest private companies controlled about 29% of world coal production and 31% of exports (5). This applies especially to the world market for steam coal, where the Big Four – namely Anglo Coal, Billiton, Rio Tinto and Glencore – together accounted for a market share of 33% in 2000 and are currently involved in various coal-related activities worldwide. This group practically controls South Africa’s coal export business and according to the WEFA, which is an independent institute, has already behaved in a cartel-like manner in some sectors of the international coal market – a practice that is likely to have repercussions for prices and tonnages (6).
    • On the international steam-coal market there are also signs of shortages for other structural reasons. The market surplus that existed up to the end of the 1990s has now receded noticeably in recent years as the force of demand has clearly exceeded the growth in export capacity. We have now witnessed a complete turnround from a buyers’ to a sellers’ market. If this development continues along the same lines it is calculated that the market will be facing unbridgeable supply shortages by 2006, with marked price rises setting-in as early as 2003 (7).
    • Whether these trends – which of course also depend on cyclical fluctuations - will persist or will be offset by additional investment in export capacity will mainly be determined by price outlook and profit expectations on the world coal market. As things stand at present, however, these prospects are more uncertain than ever, with the climate debate and the deregulation of the energy markets likely to exert growing pressure on coal prices and, in some cases, on coal sales too. What is more, with the worldwide trend towards more difficult geological mining conditions and increasing environmental and safety concerns the new mining developments and infrastructure investments needed to provide sufficient growth in supply are tending to drive up costs.
    • Even if output from exporting mines proves adequate in the long term, there is no escaping the fact that the international rail-borne and seaborne coal trade involves enormous transport distances – in some cases the fuel has to be carried from one continent to another halfway around the globe. This means spanning physical and even ‘political’ distances, some of which are very large indeed and consequently prone to disruption.
    • Moreover, one can never rule out the possibility of shortages and disruptions to supply affecting the international coal market as a consequence of sudden increases in demand due to unexpected shortfalls in other energy sectors (for example in the event of an oil or gas crisis, a nuclear malfunction or simply extreme weather conditions).
    • Finally there is the economically and internationally relevant question of whether the industrial nations should abandon their own coal deposits and focus their long-term expectations on low-cost, affordable coal resources from the developing and threshold countries, such as Indonesia, Colombia and South Africa, or whether they should make long-term preparations for a time when economic recovery means that these resources will be increasingly required for domestic consumption in the producing countries and regions.

    The world coal market is therefore subject to considerable supply risks. The question of whether stockpiling based on imported coal would be a sufficient solution to the problem is of course nothing new. And the answer to it is clear – even if it is held that satisfactory solutions can be found to problems such as the fuel quality required by German consumers and the technical difficulties that are likely to increase with stockpile size and storage duration.

    Professor Paul Mikat, former State Minister

    Mere stockpiling of imported coal – as made clear back in 1990 by the Coal Commission chaired by Professor Mikat, which was set up by the then Federal Government – is only able to “cushion the transition to changing situations”.

    However, stockpiles of imported coal “cannot absorb structural changes…: (they) only buy thinking time”. On the other hand - as the Mikat Commission also clearly pointed out – exploiting one’s own reserves provides “the option to use these resources as an opportunity for diversification and in this way to effect structural changes to the energy mix” (8).

    The Mikat Commission stressed that it was important to have a “living mining industry”, in other words “the ongoing extraction of mineral resources”, which “(must) be at least large enough to provide a viable option” (9).

    The Commission went on expressly to advocate that energy policy-based subsidies were needed “so that the domestic mining industry could provide an alternative to the risks affecting the world market” (10). –

    In its thorough examination of the world coal market situation the 1991 Commission also came to the following conclusion: “Reasons of national and international security of supply require a German coal industry to be maintained in the long term” (11).

    The Mikat Commission was quick to foresee that indigenous reserves of solid fuel had a “strategic importance” at European level too (12).

    In its Green Paper on security of energy supply, which was released at the end of 2000, as well as in more recent contributions to the Green Paper debate, the European Commission takes a similar view of the role played by the Community’s coal reserves, recommending that a subsidized minimum production base be maintained in order to ensure continued access to Europe’s coal deposits (13).

    This view has now been adopted by the European Council (with the approval of the other EU institutions). As far as the geopolitical and security risks associated with the energy sector’s growing dependence on imported fuel are concerned, and particularly with regard to the cost-based competitive advantages of third-country coal, the new Council Regulation on aid to the coal industry (14), which came into force in 2002, contains a number of objectives that not only call for account to be taken of the social and regional aspects of further restructuring of the domestic coal industry but also (see Article 1, point 2) stress “the need for maintaining, as a precautionary measure, a minimum quantity of indigenous coal production to guarantee access to reserves”.

    Member States with appropriate coal deposits and production capacities are now called upon to take appropriate steps at national level to comply with this new European plan for the coal industry in the interest of security of energy and coal supply.

    References:

    (1) International Energy Agency: Energy Policies of IEA Countries – Germany 2002 Review, Paris 2002, esp. pp. 12, 71ff.

    (2) See F.-W. Wellmer/F. Barthel (BGR): The role of coal for global economic development – the geopolitical situation of coal utilisation, in: Forum for future energies (publ.): Conference proceedings ‘The future of coal – prospects for modern coal technologies’, Berlin 2001, pp. 76ff.

    (3) Cf. Fed. Min. of Econ. Document no. 465: Fuel reserves, resources and availability, Berlin 1999,

    (4) H. Gruss/E.-O. Kantelberg/H.-W.Schiffer (publ. RWE Rheinbraun): The world coal market in 2002, pp. 15

    (5) See ibid. pp. 18

    (6) Cf. S. Couser/D. Goldsack: Concentration trends in the international coal industry, in: ZfE (journal of the energy industry) vol. 25 (2001) no. 1, pp. 43ff.

    (7) See H. Gruss: Developments in supply and demand on the world coal market (2001), in: ZfE (journal of the energy industry) vol. 26 (2002) no.. 1, pp. 3ff.

    (8) See interim report of the Coal Commission set up by the Federal Government (under the chairmanship of Prof. Dr. Dr. h.c. mult. Paul Mikat) of 21.3.1990, pp. 160

    (9) ibid. (10) ibid.

    (11) Closing statement from the Coal Commission of 18.3.1991, sub-section 2, para. 3.

    (12) P. Mikat: A concept for German coal – notes on the Coal Commission report, in: Current Energy Issues, vol. 40. (1990) no. 9, pp. 615ff.

    (13) Cf. European Commission Green Paper: ‘Towards a European strategy for energy supply security’, Luxemburg 2001, esp. pp. 82ff. and pp. 112ff., and also European Commission: Energy – let us overcome our dependence, Luxemburg 2002, pp. 21.

    (14) European Council Regulation no. 1407/2002 of 23.7.2002 on state aid to the coal industry (in OJ L 205 dated 2.8.2002, pp. 1ff.)

    Source: German Hard Coal Association http://www.gvst.de

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