Coal market to face dropping quality, rising costs

Fri Nov 23, 2012 11:37am EST

Related Topics

* Highest quality coal mines with low costs have been depleted

* Environmental regulation will require expensive retrofitting

* Gas to catch up with coal by 2030

By Henning Gloystein and John McGarrity

LONDON, Nov 23 (Reuters) - The quality of thermal coal for exports is dropping, prompting concern among utilities and mining companies that coal-fired power plants will become more expensive to run and will fall foul of stricter environmental laws.

Coal has been the dominant fuel for electricity generation in developed countries since the 19th century, and emerging economies such as China and India have in recent decades ramped up coal use to account for more than half of global demand.

Some investment analysts argue that this "golden age" of coal may be coming to an end, as large coal fields discovered in the last two decades, such as in Indonesia or Colombia, were easy to develop and the most economical reserves of the fossil fuel are fast being depleted, leading to a drop in the quality of what remains.

"High-quality and cheap coal supply is under serious threat ... (and) we believe the 'golden age' of coal will end sooner than expected," Axa Investment Managers said in a report.

Energy research and consultancy Wood Mackenzie says the quality of coal from Indonesia, the world's biggest exporter, is already low and will deteriorate further.

This means that to get new supplies out of the ground could become increasingly uneconomical and many new projects may be shelved.

TIGHTER REGULATION

The drop in coal quality also clashes with tighter environmental regulation regarding coal mining and coal-fired power generation in both developed and emerging economies, which could dim investment opportunities.

In developed economies, coal power stations that have already been built may require expensive upgrades to meet tightening regulation and cope with lower coal quality.

"The high age of installed capacity in industrialised countries implies that retrofitting an aging fleet of plants will incur major costs," Axa said.

"Moreover, the typical size of these plants, which were built in a time of abundant, high quality coal, makes them particularly costly to retrofit ... but efficiency will not be enough to recoup investments when supplies decrease in quality."

In emerging markets, analysts think coal might not be king for as long as initially expected as the high degree of pollution from coal-fired electricity generation will result in public anger and lead to tighter regulation, making it increasingly difficult to justify use of the fuel.

"For the next round of rapidly growing economies, coal will be shorter lived than expected," Axa said.

COAL STILL GROWS BUT GAS CATCHES UP

Despite the pollution, analysts say that developing countries will push ahead with coal build because alternative forms of energy might not be readily available or affordable.

In China, planners are locating new coal-fired power stations close to the country's coal reserves in northern provinces, where the impact of pollution and land issues are less of a challenge, said Miswin Masweh, a commodities analyst with Barclays.

"Locating power plants close to mines and transporting the electricity over vast distances using efficient power lines will mean they can burn dirtier types of coal and reduce congestion on China's road and rail network," he said.

New coal plants in Africa will be able to burn dirtier, less efficient forms of coal without much regard to the environmental consequences, as government policy was heavily skewed towards fast economic growth, Masweh added.

The World Resources Institute said that 1,199 new coal-fired plants with a total installed capacity of 1.4 million megawatts (MW) are being proposed globally, most of which are in China and India but sub-Saharan Africa and Latin America may also see a big increase.

Despite this expected growth, coal is expected to be challenged by gas as the dominant fuel for power generation.

Current annual global coal burn is 3.6 billion tonnes of oil equivalent, compared with 2.7 billion tonnes of gas and 4 billion tonnes for oil, but the International Energy Agency (IEA) says that gas could catch up with coal by 2030. (Editing by Keiron Henderson)

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