17 minute read
The Future Challenges Of Coal
Sabrin Chowdhury, Fitch Solutions, Singapore, provides insight into the future of the coal industry in Southeast Asia and Australasia, and the potential challenges it could face.
Coal will remain the dominant source of power for most of Southeast Asia and Australasia in the coming decade at least, which will support the mining of coal and coal trade in the region. This is mainly because coal remains the most practical means to stimulate aff ordable electricity generation growth at the pace and scale needed to support continued economic growth in the region. Nevertheless, stricter environmental standards in Asia will continue to hurt coal miners by increasing compliance costs and delaying project development. Reducing carbon footprints has gained significant impetus since 2020, with the shift to the low-carbon economy to have a significant impact on the regulatory frameworks of most major mining markets in Southeast Asia and Australasia, as governments commit to their Nationally Determined Contributions to the Paris Agreement. Asia Pacific governments will face considerable challenges on this front, where major mining countries, including Indonesia and Australia, will remain largely reliant on fossil fuels (primarily coal) for energy generation.
Indonesia and Australia to dominate regional thermal coal production in absolute terms
Indonesia and Australia will continue to produce the bulk (approximately 85 – 90%) of total thermal coal output in Southeast Asia and Australia. These countries will also continue to account for approximately 12% of global coal production in the coming decade. The outlook for thermal coal production in Indonesia and Australia is bolstered by government support, domestic needs, and a strong demand from coal-fired power plants in the region. However, while absolute production levels will remain elevated over the coming decade at least, production growth will slow in the long term due to weak coal prices and rising environmental regulations.
Australia
With regard to Australia, the coal industry will experience limited production growth over the long term, as prices stabilise and environmental regulations heighten, along with increasing competition from lower-cost foreign producers. Coal production growth in Australia is set to average 0.05 % y/y during 2021 – 2030, with output increasing minimally from 297 million t in 2021 to 298 million t in 2030. As investors become wary of climate change issues and global energy consumption patterns shift away from coal, established players will increasingly leave the high-cost Australian coal market, while smaller players enter. Anglo American, Peabody Energy, and Vale have all started liquidating their Australian coal portfolios, with Rio Tinto having completely exited the coal market altogether. In place of these established players, smaller, lesser known players, mostly private equity, have entered the market, some of whom have no prior mining experience. Nevertheless, in the next 1 –3 years, Australia’s annual thermal coal output will rise due to increasing production at MACH Energy’s Mount Pleasant mine (10 million tpy), and Sojitz and U&D Coal’s Orion Downs mine (1.5 million tpy). The ramp-up at Whitehaven Coal’s Vickery mine, which started in 2019, will take approximately six years to reach its annual rated capacity of 8 million tpy. The Carmichael Project is also expected to produce 8 – 10 million tpy of thermal coal and cost US$1.4 billion during its initial phase.
Environmental issues and protectionism will continue to pressurise Australia’s coal sector in the coming years. As a case in point, though the Queensland government has approved Adani Group’s Carmichael coal, rail, and port projects, the group has had to fund 100% of the project, as announced in November 2018. In November 2020, the group rebranded its Australian unit as Bravus Mining and Resources. Banking giants, HSBC and Deutsche Bank, as well as European banks such as BNP Paribas, Crédit Agricole and Société Générale, refused to bankroll the expansion due to intense lobbying by environmental activists. Australia will be at risk of a sudden tightening of environmental regulations, placing in limbo numerous new coal mining projects in the pipeline. As per Fitch Solutions’ Global Mines Database, 79 of the 176 new coal projects globally are situated in Australia, although not all of them will reach fruition going forward.
Indonesia
As for Indonesia, the country will remain the largest coal producer in absolute terms in Southeast Asia in the coming decade at least, although production growth will slow in the coming years. Coal production growth in Indonesia will average 0.48 % y/y during 2021 – 2030, with output increasing from 468 million t in 2021 to 487 million t in 2030. Coal will remain a key fuel of choice for Indonesia’s power expansion, and a key generation source over the coming decade as coal supply remains abundant and cheaper in the market, alongside a government commitment to the source, specifically designed to protect its coal mining industry. The relatively low cost of the feedstock means that coal will remain the fuel of choice to meet surging power demand in the country. The government aims to boost domestic coal demand and support coal prices, as it expects lower demand internationally with more markets moving towards cleaner generation sources. Coal power generation accounted for approximately 60.7% of Indonesia’s power mix in 2020, and this figure should rise to 65.0% by 2030.
Dynamics in Indonesia will reduce coal supply on the international market and provide some support to prices. The combination of slower coal production growth and strong domestic demand growth will cap the country’s exportable surplus over the coming years. Weak export growth will be compounded by the government erecting barriers to coal exports, in order to ensure adequate supply for domestic power plants. The Energy and Mineral Resources Ministry fixed coal’s Domestic Market Obligation for 2020 at 25% mining production reserved for domestic use. In the long term, coal output growth will continue to slow, in line with lower coal prices, poor transportation networks and stringent regulations that will increase costs for miners. PT Bumi Resources Tbk is the largest coal
miner in Indonesia, while PT Indo Tambangraya Megah Tbk specialises in the production of premium-grade coal for the global energy market.
Vietnam’s coal production to rise steadily
Vietnam’s coal mining sector will outperform in the coming decade in comparison with other countries in Southeast Asia (excluding Indonesia). Coal production growth in Vietnam will average 1.02% y/y during 2021 – 2030, with output increasing from 39 million t in 2021 to 42 million t in 2030. The resource industry in Vietnam is largely state-led and heavily regulated by the government. State-owned miner, Vinacomin, is the largest coal producer in the country at present. It accounts for 95% of domestic coal production and has a production capacity of around 40 – 45 million tpy. The bulk of its coal reserves are located in the northern area of Quang Ninh province and the Red River Delta Basin. The country is rapidly developing new coal-fired power plants, which will bode well for the coal mining sector. In July 2017, the government tasked the Ministry of Industry and Trade with developing a roadmap for the coal mining sector to ensure sustainable supplies and a more competitive marketplace. Off icial forecasts put coal consumption at 100 million tpy by 2030. Nevertheless, the mining sector will continue to be dampened by decreasing coal prices in the long term, higher natural resources tax (which has been implemented since July 2016), as well as higher production costs due to the depletion of coal layers, which are easier to access. In fact, traditionally an exporter, Vietnam turned into a net importer of coal in 2016.
Figure 1. Australia is at the greatest risk of project cancellation.
Figure 2. There will be a steady, albeit slow, decline for coal.
Figure 3. Australia and Indonesia are expected to dominate absolute production.
Low coal usage in power mix to dampen future prospects for coal mining in Thailand and Myanmar
Thailand and Myanmar will continue to incorporate the least amount of coal in their power mix compared with other countries in Asia in the coming decade. Thailand’s coal-fired power as a percentage of total electricity generation from all sources will amount to only 16 – 17%, while Myanmar’s
figure will remain within 6 – 8% during 2021 – 2030. This is compared with 30 – 60% of the power mix for the rest of Southeast Asia and Australiasia. These limited power mix shares will be the main factor causing coal mining sectors in both countries to remain small in the coming years.
Thailand
The outlook for Thailand’s coal mining industry is far from positive. Coal production growth in Thailand will average 1.1% y/y during 2021 – 2030, with output increasing minimally from 24 million t in 2021 to 25 million t in 2030. Depleting domestic coal reserves will see Thailand increasing imports of coal to fuel its reliance on the material for power generation, instead of relying on domestic production. Due to coal being the most cost-eff ective fuel source, it will still account for a substantial portion of power generation over the coming years. However, public distrust towards coal-fired power generation over environmental and health issues will continue to rise, limiting investment in coal mining. Currently, the majority of the electricity generated in Thailand comes from gas. Thailand’s latest Power Development Plan (PDP 2018 – 2037), which was approved by the Cabinet in April 2019, sets out power capacity expansion targets of reaching 77 GW and outlines a shift in power mix targets amid eff orts to diversify away from gas. While the country will look to reduce its dependence on gas-power generation from an estimated 65.4% in 2018 to 53% by 2037, new sources of power will predominantly come from non-fossil sources (35% of the power mix) and only to a lesser extent from coal (12%).
Philippines to continue relying on coal
Myanmar
Myanmar’s electricity also comes mainly from gas, with coal mining to remain limited in the long term. Coal production growth in Myanmar will average 8.9% y/y during 2021 – 2030, with output increasing from 2.5 million t in 2021 to 4.7 million t in 2030. Additionally, with the political upheaval in Myanmar since the February 2021 coup on the government by the Tatmadaw (Myanmar military) expected to last for many years, investment in the mining sector will see a sharp decline as international firms seek to leave the market. For now, mining operations are running smoothly, although firms will increasingly exit the market as international pressures rise.
Currently, most coal mining in Myanmar is done in Shan State, with Eden Group operating the largest coal mine in Tigyit with a capacity of 828 000 tpy. Ngwe Yee Pearl Company and the Tatmadaw also have a 25-year coal mining deal in Hsipaw, Tang Yan and Mong Tai townships in Shan State. Additionally, Min Shwe Hlwar Company has also operated coal mines 500 km off of the Nam Ma and Nar Nang villages since early 2019. However, most coal mines in Shan State are located underground, beneath residential homes and there is significant social backlash as blasts create noise pollution and waste that flows into the Nam Pang River, contaminating the largest tributary of the Than Lwin River. According to a 2008 law, the central government has the sole authority to mine natural resources, granting coal mining permits to entrepreneurs without the consent of locals. Outside of Shan State, Tun Thwin Mining Co. Ltd and No. 1 Mining Enterprise operate the Paluzawa coal mine in Kalewa, Sagang Region. With strong public opposition, the outlook for the coal mining sector in Myanmar remains bleak.
Coal mining will come under significant pressure in the Philippines in the coming years as the Philippine government has declared a moratorium on coal power projects in October 2020 and will no longer approve the construction of any new coal power plants. The government has stressed though that coal will remain the dominant power generation source for years to come, with several projects in the pipeline that were already approved prior to the announcement. Coal projects with environmental compliance certificates and permits from local governments will also be excluded from the ban. Coal production growth in the Philippines will stagnate during 2021 – 2030, with output remaining around 14 million t throughout the period. In recent years, coal mining and coal-fired power projects have been facing very strong and increasing public opposition, including the involvement of several religious associations who signed a manifesto to advance the coal divestment movement and to disallow investments into new ‘dirty’ assets. In May 2020, more than 42 faith-based institutions, including Catholic churches, announced that they were divesting US$1.4 billion from Figure 4. Mining production growth is expected to be slow across the board in Southeast Asia fossil fuels. This follows aft er and Australasia. the launch of Church-CSO
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Empowerment for Environmental Sustainability (ECO-CONVERGENCE), through which various church leaders and civil society groups have jointly urged domestic banks to stop funding new coal-fired power projects. In September 2019, more than 50 civil society groups and people’s organisations participated in a nationwide protest, urging President Rodrigo Duterte to impose a moratorium on new coal-fired power plants. Several key utilities in the Philippines, such as AC Energy and MERALCO, have also signalled intentions to shift away from coal in recent months.
Nonetheless, as coal remains the cheaper and more reliable option to meet with the country’s power demand surge, particularly as resources in the Malampaya gas field deplete with limited scope for exploration success and infrastructural headwinds to LNG import capacity, the Philippines’ power mix will remain dominated by coal over the coming decade. The share of coal will increase from an estimated 50.8% in 2020 to 59.3% by 2030, with some downside risks. Semirara Mining Corp. (SMC) is the biggest coal producer in the Philippines and operates the only opencast coal mine in the country. The miner was given exclusive rights by the Department of Energy to mine coal and conduct operations in Semirara. However, various challenges have emerged in the form of a new excise tax introduced by congress in December 2017 as part of the new tax reform programme, in addition to local opposition to SMC’s coal expansion project in the region due to concerns over water pollution. While rising environmental concerns will continue to hinder mine development, the Philippines’ dependence on coal in the long term will keep SMC’s outlook positive. Malaysia
Malaysia has a very small coal mining sector, located in the state of Sarawak. Malaysia’s coal production will continue to stagnate at 2.6 million t in the foreseeable future. Despite the prevalence of gas in the power mix, the Malaysian government is hoping to diversify its primary energy sources so that rising power demand can be met and without having to rely too heavily on dwindling domestic gas supplies. Hence, the government is keen to expand both coal-fired power generation and power generation from renewable energy sources. However, environmental opposition to coal is rising, with Malaysia’s CIMB announcing detailed plans to end coal financing by 2040, making it one of the banks in the region with the strongest climate policy at present. This follows aft er major banks in the region have signalled intentions to start moving away from financing coal. This being the case, Malaysia’s Maybank and RHB Bank still appear committed to financing coal projects around the region, despite their new environmental, social, and governance policies.
Cambodia
Malaysia and Cambodia will see coal’s share in the power mix to rise steadily over the coming decade at least, but both countries will mainly rely on imported coal rather than domestically mined coal. Both Malaysia and Cambodia rely on coal imported from Indonesia at present, and there will be little change in this dynamic. Cambodia does not produce any coal, and this will remain the case in the longer term. In Cambodia, the lack of sound infrastructure continues to be a major hurdle for miners particularly for the development of bulk commodities such as coal. Similar to other countries in the region, there is also significant social and environmental opposition to coal mining in Cambodia. Additionally, foreign investors are also not allowed to own land under Cambodia’s Constitution, and are only able to lease the land for a period of up to 70 years with the option to renew thereaft er. However, the country’s investment law allows foreign companies to own 100% of their mining investment, in addition to the fact that foreign-owned assets will not be nationalised.
Conclusion
Figure 5. Asia will dominate the global production of coal. Overall, Southeast Asia and Australiasia will remain highly dependent on coal for power generation in the coming decade at least, even as the rest of the world reduces reliance on fossil fuels, which will in turn support the coal mining sector and coal trade in the region. In absolute terms, Indonesia and Australia will be the leaders of coal production, along with a high percentage of coal-fired power in the countries’ power mix. Vietnam’s coal production will outperform regional players, aft er Indonesia and Australia, while Thailand and Myanmar will remain laggards in the coal mining sphere. Malaysia and Cambodia will continue relying on coal imports, with muted growth for domestic coal mining.
