China is unlikely to be the saviour of US coal producers

Chinese demand could boost US coal companies, but only in the short term

US coal companies have struggled since the shale gas boom cut into coal’s traditional share of the domestic electric power sector. Plans to build new coal-fired power plants have also been scrapped because of stricter environmental standards. One encouraging sign was Peabody Energy’s announcement in late December last year that it would work with China’s Shenhua Group to boost its coal exports. Yet while this might offer a short term solution, in the long run China’s demand for coal is likely to weaken.

Peabody Energy operates mines in the US states of Montana, Wyoming and Illinois, as well as in Australia. It and Shenhua will form a Singapore-based joint venture, Sino-Pacific Coal Trading Corp., which is expected to supply coal from Peabody’s production to Shenhua’s electricity-generating units in 2014. Christopher J. Hagedorn, the company’s energy president, hailed the agreement as a “significant milestone” in Peabody’s Asia growth strategy.

Hagedorn said China and India’s appetite for coal would account for more than 80% of annual world coal demand, which he said would grow by 1.2 billion tonnes in the next five years. China’s short-term demand could be a boon for Peabody and its peers. In China domestic producers often allocate more than 30% of their revenue to pay 109 types of taxes, which means the price tag of imported coal is often much lower. One tonne of US coal currently costs around 600 Yuan, while the price of Chinese coal is around 780 yuan.

Yet a number of studies suggest that Chinese demand will soon wane. Citibank has forecasted that China’s economic growth would slow to 5.5% in 2020 from the current 7.4%, on the assumption that the country will not need as much energy to power its economic engine. A University of Oxford study also said Chinese demand would fall as the country’s leadership pursues a range of new measures including environmental regulation, carbon pricing and investment in cleaner sources of energy.