Primary energy consumption has increased in excess of 330% over the last 50 years. More than 40% of global electricity generation is coal-based, and it is estimated that coal will remain the second largest source of energy in the long run. The South African thermal coal market, IchorCoal’s focus market, is uniquely positioned due to its favourable export location as well as domestic supply and demand dynamics.
Global Energy Market
Global energy consumption has increased more than three-fold over the last 50 years. Research demonstrates a clear link between GDP growth and energy use, especially in emerging markets. China for example saw its energy use accelerate relative to GDP in the 2000s with the boom in energy-intensive manufacturing.
Total primary energy demand and GDP in selected countries, 1971-2012
Source: IEA World Energy Outlook 2014
Already since 1998 emerging markets have been the main force behind global GDP growth. Going forward, primary energy demand is expected to increase by almost 40% over the 2012 to 2040 period, most of which is expected to come from emerging markets. China is seen as the main driver of increased energy demand in the current decade; however, India is expected to take over in the 2020s.
Primary energy demand vs. Share of global growth 2012-2035
Source: IEA World Energy Outlook 2013; UNCTAD, April 2014
Fossil fuels supply 87% of the world’s primary energy demand. Coal is currently the largest source of volume growth in primary energy consumption by fuel. Coal is cheaper and easier to ship than gas which further supports growth in coal consumption. The International Energy Agency (IEA) projects that the prices of coal will remain more competitive than natural gas beyond 2040.
Typical cost breakdown for 5000 km transport
Source: Laszlo Varro, IEA, The Black Tide – coal in Asia; OECD/IEA 2012; UNCTAD, April 2014
According to the IEA coal is estimated to remain the second largest source of energy also in the years to come. Over the longer term, coal is even projected to again become the number one primary source of energy.
Historic and future world primary energy mix (scenario 2100)
Source: World Coal Institute 2014
Global Thermal Coal Market
Global coal demand is expected to increase by 15% to 2040, with the largest increase (two-thirds) occurring during the first 10 years of the forecast period. Chinese coal demand is projected to increase to just over 50% of global production and then plateau thereafter. The IEA expects coal consumption in the electricity generation sector of the United States to decline by more than a third due to regulations. As a result, India will overtake the United States as the second largest coal consumer before 2020 and surpass China as the world’s largest coal importer soon thereafter.
Global coal demand by key region
Source: IEA World Energy Outlook 2014, London November 2014
The world’s remaining recoverable coal resources are particularly large, representing around 2,900 years of production at current rates.
Lifetimes of fossil-fuel resources (expressed as # of years produced and remaining resources based on production rates in 2013)
Source: BGR, 2013; O&GJ, 2013; USGS, 2012; USGS, 2012; BP, 2014; NEA/IAEA, 2014; IEA World Energy Outlook 2014
Despite a relatively small production volume, South Africa is the world’s (tied) 4th largest exporter of coal, supplying both Atlantic and Pacific basins. Among countries with surplus capacity, South Africa is best placed to service growing demand from Asia due to its favourable location and infrastructure. South African coal exports can swing relatively easily and profitably between the Pacific and Atlantic basins. As such, South Africa is expected to remain an important source of coal supply.
Global coal import and export dynamics 2014
Source: Trade data; Macquarie Research, February 2015
South African cash costs for seaborne thermal coal are amongst the most competitive globally.
FOB cash costs for seaborne thermal coal exports, 2012
Source: IEA World Energy Outlook 2013; UNCTAD, April 2014
South African Thermal Coal Market
Approximately 70% of domestic coal production is used for electricity generation by Eskom. Coal remains crucial to the country’s power generation with Eskom accounting for circa 45% of electricity used in Southern Africa and 92% of that coming from coal plants. Due to the relatively low transport distances to power stations and the high share of lower quality material, coal is expected to remain a low-cost option for South Africa, with only imported hydro offering comparable value.
Normalised costs of power generation by fuel and technology in South Africa (calculated based on an assumed weighted average cost of capital of 7%)
Source: IEA Africa Energy Outlook 2014
Domestic demand for thermal coal is further increased by the imminent supply shortage experienced by South African power stations. Existing South African power stations do not have enough coal contracted to the end of their service lives. Most existing coal-fired power stations need to secure coal supplies well into the 2030s, with four stations requiring significant volumes of coal beyond 2040. The situation will be further intensified with new power plant generations coming online. Eskom is expecting a supply defecit from 2016, with new supplies of circa 60mtpa needed in next 5 to 7 years. Moreover, South Africa’s 40-year coal supply plan requires 3.8bt of coal, with 1.7bt currently un-contracted.
Eskom’s future coal supply
Source: Eskom; South African Coal Roadmap, June 2013
BGR, 2013; O&GJ, 2013; USGS, 2012; USGS, 2012; NEA/IAEA, 2014
BP Energy Outlook 2035, January 2014
BP Statistical Review of World Energy 2014
DMR, 2009; Eberhard, 2011
IEA World Energy Outlook 2012
IEA World Energy Outlook 2013
IEA World Energy Outlook 2014
IEA World Energy Outlook 2014, London November 2014
IMF April 2014
Laszlo Varro, IEA, The Black Tide – coal in Asia
Macquarie Research, February 2015
South African Coal Roadmap Overview of the South African Coal Value Chain, October 2011
South African Coal Roadmap, June 2013
UNCTAD, April 2014
World Coal Institute 2014