“Maximum coal burn” to continue in Europe, says BofAML report
Last updated on 21 March 2014, 10:08 am
Falling coal prices could force up emissions, as coal replaces gas on the grid, says bank report
By Gerard Wynn
Coal prices will fall this year, Bank of America Merrill Lynch said in a global research report on Thursday, citing ramped up supply from Colombia and weak Chinese demand.
Lower global coal prices would consolidate the superior profit margins for European power generators burning coal instead of natural gas.
That in turn will add upward pressure on carbon emissions.
Disruption of gas supplies from Ukraine in the recent crisis would not European drive demand for coal, because of superior profits already compared with gas.
“European generators are already maxing out coal burn capacity due to a huge margin difference favouring coal over gas,” Bank of America Merrill Lynch said in its research note. “Another bad year for king coal.”
Global coal prices would fall in the near term, following an end to disruption of Colombian shipments by US-based mining company Drummond, and weak demand in China.
“Near term we see downside to prices both in Europe and Australia, stemming from a return of Drummond exports from Colombia, affecting European prices most, and weakening demand from China, affecting Australian prices most.”
“We expect front prices in Europe to touch below $70/mt at some point during Q2 as Drummond resumes exports to Europe from late March.”
Drummond halted all exports from Colombia in the first week of January, after it failed to meet new standards which banned the use of barges and cranes to load ships, in rules aimed at preventing spillage and pollution at sea.
Exports from the fourth largest supplier of coal worldwide were also disrupted last year by a string of industrial strikes.
“We expect Colombian exports for the full year to rise to a new high this year as disruptions ease and the Cerrejon mines continue ramping up their expansions, barring further disruptions of course,” the investment bank said.
That would add to continuing strong exports from Australia and South Africa.
Chinese demand, meanwhile, was weakening as a result of plans to cut coal’s share of energy use in a bid to improve air quality in cities, and could weaken further depending on the country’s macroeconomic outlook.
Bad news for coal is bad news for carbon emissions in Europe, since lower prices push coal-fired electricity onto the grid in place of gas, which emits about half as much carbon dioxide.
Britain’s carbon emissions rose more than 4% in 2012, mostly because more coal-fired electricity generation.
“There was a large increase (32 per cent) in coal consumption in power stations with a corresponding decrease (30 per cent) in gas consumption, driven by relatively high wholesale gas prices,” the Department of Energy and Climate Change said in February.
“These changes resulted in an increase of around 10 per cent in emissions from electricity generation.”
Low prices have seen a similar replacement of gas with coal in Europe’s biggest economy, Germany, where profit margins from burning gas, called spark spreads, are negative, leading to the closure, mothballing or sale of gas-fired power plants.
German coal-fired power generation rose by 7.7 terawatt hours in 2013, compared with a drop in gas-fired power generation of 10.5 TWh, according to the Fraunhofer Institute.