January 16th 2013

2008200920102011 2012 2013 2014 2015 2016 2017

Oil prices
Brent; US$/b

97.6 61.8 79.6 110.9 111.9 104.5 104.7 107.2 110.0 115.0
6
6
3
4
7
0
5
5
0
0

Non-oil commoditiesa
Total
12.2 -22.424.0
Food,
feedstuffs
&
28.0 -20.310.7
beverages
Beverages
18.8 1.0 18.0
Grains
29.1 -28.96.9
Oilseeds
31.8 -21.79.4
Sugar
30.1 29.6 24.3
Industrial raw materials
-5.3 -25.745.4
Metals
-9.5 -28.540.1
Fibres
2.3 -11.542.2
Rubber
16.4 -25.681.0
a
% change in US dollar prices.
Source: Economist Intelligence Unit.

26.1 -10.7 -0.5

-0.8

0.1

2.4

2.0

30.1 -3.7

-3.9

-5.4

-0.4

2.4

1.7

21.1
41.3
21.4
23.6
21.1
12.8
43.2
33.3

-9.2
-0.6
-5.9
-6.6
4.9
5.8
2.4
3.5

6.0
-11.1
-3.1
4.1
5.9
6.3
4.9
5.1

3.3
-1.8
-0.6
0.0
0.7
0.0
3.3
1.8

3.7
2.1
1.1
9.5
2.3
2.3
3.3
1.2

3.4
0.3
1.8
8.7
2.4
2.4
3.2
1.2

-20.1
0.5
3.7
-16.9
-19.9
-13.0
-36.0
-26.6

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EIU : Coal Update 16 Jan 2013
Demand
The Economist Intelligence Unit has revised down slightly its estimate of coal
consumption in 2012 to just 1.9% (2% previously), down from 6.1% in 2011. The
deceleration is largely accounted for by a sharp contraction in US consumption and
weak consumption growth in China. Not only did China's economy slow in 2012, but
ample reservoirs led to greater use of hydroelectric output in power generation.
Economic slowdowns elsewhere in the world, including in India, also constrained coal
consumption, as did the greater use of natural gas and renewables in electricity
generation in the US. However, demand in the EU is estimated to have risen strongly
in 2012, despite the economic slowdown, owing to favourable price differentials with
gas. Stronger global economic growth, as well as a rise in US natural gas prices,
should allow some recovery in coal demand from 2013. Nevertheless, annual growth is
forecast to remain subdued compared with the pre-crisis years, at 3.6% on average in
2013-14, as China pursues structural changes in its economic growth and energy
consumption.
Supply
Global production growth is estimated to have slowed in 2012 to 2.8%, down from
5.8% in 2011, owing to some output cuts, particularly in China and Indonesia, in
response to low prices, and in the US owing to weak demand. The downturn in China's
output growth will have been largely a response to weaker domestic demand. Coal
supply is expected to pick up modestly thereafter, growing at an average annual rate
of 3.7% in 2013-14, in tandem with some recovery in demand growth, particularly in
2014.
Stocks and prices
The coal market was in a small deficit of 28m tonnes in 2011. However, an easing of
consumption growth, combined with plentiful supply, is expected to have restored a
market surplus in 2012. Stocks in China, in particular, built over the course of 2012.
The market will remain in comfortable surplus in 2013-14 given strong supply growth.

Annual average prices fell by nearly 21% in 2012 to an annual average of

US$96.4/tonne. In the light of the demand-and-supply dynamics of the market, there
seems little reason to expect a strong recovery in prices in the coming months (barring
unforeseen or weather-related supply disruptions, or a possible demand shock if the
northern hemisphere winter is unusually cold). However, there are signs that prices
will not fall further. Coal stocks at Chinas major power generators and ports are
beginning to ease. In addition, supply cutbacks in some major producers will help to
stabilise prices. Although modestly stronger consumption should boost sentiment in
the market, production will comfortably meet supply, and we expect annual average
prices to slip again slightly in 2013 before recovering in 2014 in tandem with stronger
consumption growth.
Coal: prices
2011
2012
2013
2014
Pricesa
1 Qtr
128.99
113.65
88.00
105.00
2 Qtr
120.57
95.54
92.00
102.00
3 Qtr
121.32
89.40
98.00
105.00
4 Qtr
114.91
86.87
100.00
108.00
Year
121.45
96.36
94.50
105.00
% change
22.7
-20.65
-1.93
11.11
a
Australian, thermal, Newcastle/Port Kembla, US$/metric tonne.
Sources: World Bank; Economist Intelligence Unit.

2015
110.00
-

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19 Dec 2013
World coal: EIU's monthly coal outlook

Demand
The Economist Intelligence Unit estimates that global coal consumption rose by just
2% in 2012 (1.8% previously), down from 6.1% in 2011. The deceleration is largely
accounted for by the expected contraction in US consumption and sharply weaker
consumption growth in China. This has come on the back of an easing of the overall
Chinese economy and is also a reflection of the greater use of hydroelectric output
and gas in power generation. Economic slowdowns elsewhere in the world, including in
India, were an additional factor, as was the greater use of natural gas and renewables
in electricity generation in the US. However, demand in the EU is estimated to have
risen strongly in 2012, despite the economic slowdown, owing to favourable price
differentials with gas. Stronger global economic growth, as well as a rise in US natural

gas prices, should allow some recovery in coal demand from 2013. Nevertheless,
annual growth is forecast to remain subdued compared with the pre-crisis years, at
3.5% in 2013-14, as China pursues structural changes in its economic growth and
energy consumption.
Slower GDP growth in 2012 and mild weather depressed China's demand
China became a net importer of thermal coal in 2007 and the world's largest importer
in 2011, when it accounted for nearly 50% of global coal consumption. China relies on
coal for more than 80% of its power generation. Having expanded by close to 10% in
2011, consumption growth slowed markedly in 2012, to just 2.8% year on year in
January-September, according to the China National Coal Association (CNCA). The
weakness id partly attributable to strong hydroelectric production in 2012 as well as
mild weather, but it is also a reflection of the wider economic slowdown. Coming on
top of record levels of coal importsup by 39.5% in January-October this year, partly
to take advantage of lower international prices relative to domestic pricesthese
trends have led inventories to rise to all-time highs. According to the National
Development and Reform Commission (NRDC), coal inventories in major power plants
at end-October reached 93.71m tonnes, equal to 29 days' usage, eight days more
than at the same time a year earlier.
China's coal consumption will pick up but will remain relatively subdued
We expect coal consumption growth to have been modestly higher in the final quarter
of the year and estimate growth of 3.5% for the year as a whole. Economic growth in
China is expected to start to pick up moving into 2013 as the authorities are taking
steps to support activity, but growth in coal demand is likely to remain slower in 201314 than in recent years. Overall economic growth will be less buoyant, and efforts to
curtail emissions are likely to constrain coal consumption. While it will not be easy for
China to wean itself from its dependence on coal, the 12th five-year plan (2011-15) for
the first time sets climate-change targets and envisages, in addition to an
improvement in overall energy efficiency, a decline in coal's energy share by
increasing the role of gas, nuclear and renewables in electricity production. We
forecast that coal consumption will grow by an annual average of 4.1% in 2013-14.
Recent consumption trends suggest US users are price sensitive
We have revised up slightly our estimate of US coal consumption in 2012 to a 10%
contraction year on year (a 15% contraction previously), following reports of some
switching back to coal use from gas in the third quarter as gas prices rose. The latest
data from the Energy Information Administration (EIA) show a 14.9% contraction in
consumption in January-August, but prices only started to rise from July. The recent
pick-up in coal consumption suggests that US utility companies are relatively price
sensitive. As we expect gas prices to remain at these higher levels and to continue to
rise in 2013-14, this could curtail the contraction in coal consumption; we expect coal
consumption to grow by 1.5% in 2013 given the low base of comparison but to fall
again in 2014, by nearly 1%.
The shale gas boom in the US is providing an abundant and cheap supply of natural
gas for electricity generation and is driving the shift away from coal. However, US

demand for coal will also be constrained by efforts at the federal level to curtail carbon
emissions, as well as increased electricity output from nuclear and renewable sources,
such as wind. Relatively unexciting economic growth is also limiting coal consumption,
as overall power demand has been relatively subdued.
In the medium term, coal consumption in the EU will start to fall
EU demand prospects depended to a large extent on price differentials with gas in
2012. Gas prices in 2012 remained high, while European coal prices fell sharply,
which, coupled with relatively low EU carbon prices and low international freight
prices, has made coal-fired generation much more cost-effective than gas-fired
generation in the EU. EU-wide consumption rose by 4.1% year on year in January-May.
Individual countries are showing some strong growth rates, with consumption in
January-July 2012 up 29.1% year on year in the UK, 18.3% in France, 87% in Portugal
and 22% in Ireland.
While energy demand will have been constrained during the course of 2012 by the
intensifying downturn in the euro zone economy, we are assuming more normal
(colder) weather this winter, which should further boost demand relative to winter
2011-12. Taking into account all these factors, we estimate that coal demand will have
risen in 2012, by a strong 5%. Consumption is expected to be flat in 2013, despite the
still favourable price differential with gas, as carbon prices are likely to start to
strengthen (assuming some steps are taken at an official level to support prices). The
planned retirement of coal-fired capacity and tightening environmental legislation will
act as a medium-term constraint on EU consumption, which we expect to start falling
in 2014.
India's consumption will grow steadily in 2013-14
Continued solid growth in Indian coal demand will be underpinned by the
government's long-term plan to raise thermal power generation capacity in an effort to
increase access to electricity in rural areas and to provide back-up for highly variable
hydroelectric power generation. However, economic growth slowed significantly in
2012, leading us to estimate a weakening of coal demand growth to just 4.2% this
year. In a potential sign of weakening demand for coal in power generation, electricity
output growth slowed to just 2.8% in June-September 2012, down from 10.4% in the
same quarter a year earlier, although power generation picked up again to grow by
5.2% year on year in October. Economic growth is forecast to accelerate in 2013-14,
but to remain below the robust rates of recent years; coal demand is expected to rise
by an annual average of 6.8% in these years.
Problems with accessing sufficient domestic coal supplies to meet demand could act
as a constraint on consumption. Owing to slower than expected growth in domestic
coal production in recent years India faces a serious coal shortageimports reached
92m tonnes in 2011 and are expected to rise further throughout the forecast period,
notwithstanding some recovery in domestic production growth. Moreover, the
weakness of the rupee in 2012 meant that the country did not benefit from the fall in
US dollar-denominated international coal prices.

New Japanese energy plans do not favour coal

Japan is usually the world's largest importer of coal and depends on imports to meet
nearly 100% of its needs. However, the government has recently announced new
energy plans that do not benefit coal as they seek to increase renewable energy
production and consumption. Notwithstanding, coal imports were up by 12.8% year on
year in the third quarter of 2012, as a number of thermal coal plants and port facilities
that were damaged in the March 2011 earthquake came back on line. We estimate
that coal consumption will have risen by around 6.5% in 2012, reflecting the one-off
return of thermal power capacity, but will slow thereafter to an annual average of
around 1% in 2013-14.
Coal: consumption
(m tonnes unless otherwise indicated)
2010
2011
China
3,352
3,678
US
951
906
EU
715
767
India
655
715
Russia
233
237
Japan
187
183
South Africa
187
190
Australia
132
129
Turkey
99
104
South Korea
114
119
World total
7,253
7,694
% change
9.2
6.1
Sources: Energy Information Administration (EIA);

2012
3,806
815
805
745
241
195
193
131
106
124
7,848
2.0
Economist

2013
2014
3,958
4,125
827
820
805
796
790
850
247
252
198
199
197
202
131
133
109
113
130
135
8,102
8,361
3.2
3.8
Intelligence Unit.

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Supply
Global production growth is estimated to have slowed in 2012 to 2.8%, down from
5.8% in 2011, owing to some output cuts, particularly in China and Indonesia, in
response to low prices, and in the US owing to weak demand. The downturn in China's
output will have been largely a response to weaker domestic demand. Coal supply is
expected to pick up modestly thereafter, growing at an average annual rate of 3.7% in
2013-14, in tandem with some recovery in demand growth, particularly in 2014.
China's output
restructuring

growth

will

moderate,

and

there

will

be

industry

There are clear signs of slowing coal output in China; the latest data from the CNCA
show that output was up by just 3.6% in the first nine months of 2012, compared with
growth of 8.7% in 2011 as a whole. In response to falling prices there have been
reports of smaller coal mines suspending or cutting back production, including in the
major coal producing regions of Inner Mongolia, Shanxi and Shaanxi, and of some nonstate-owned firms experiencing financial difficulties. In order to stem the fall in prices,
in August the National Development and Reform Commission set 2012 production

targets for these three regions, under which output was planned to fall by around 7%
from 2011 levels in Inner Mongolia and Shanxi, and by 1% in Shaanxi.
In addition to weaker demand growth than in recent years, the government is seeking
to constrain coal output in the medium to long term. This is partly owing to concerns
that reserves are being used up too quickly, but also to environmental concerns. We
forecast average annual output growth of around 4.5% in 2013-14.
Such still relatively solid growth rates will be assisted by the addition of substantial
new capacity coming on stream, which is helping to offset the loss of output from
mines that have been closed on the grounds that they are dangerous or
environmentally damaging. According to the authorities, 95m tonnes of coal
production capacity with advanced technology were added in 2011, while 407 mines
with a total capacity of 25m tonnes/year (t/y) were shut down. The authorities are
keen to capitalise on current weak market conditions to accelerate restructuring in the
industry.
US coal output will fall again in 2013
US production in 2012 has been revised down slightly to reflect the most recent data;
we now expect output to have fallen by 6.5% (6% previously). According to the EIA,
output was down 6.5% year on year between January and the first week of December.
Weak domestic consumption has been a key factor depressing consumption, which has
been only partially offset by strong export growth. That said, US exports have proved
popular in China and the EU because of the high calorific value of its coal. US coal
production is forecast to slip again in 2013 before stabilising in 2014. Although
domestic demand is expected to stop contracting in 2013, inventories will be high, and
exports are expected to soften from the second half of 2012 on a less favourable
external environment.
Some of the structural constraints on production in India are being
overcome
We have revised up our estimate of growth in India's coal production in 2012 to 9%
(7.3% previously) to reflect data from India's Ministry of Commerce and Industry,
which show growth of 9.3% year on year in the first ten months of 2012. There was
always scope for a bounceback in output growth in 2012 on base effects after heavy
rains affected output in 2011, and as a result we expect growth to slow to a more
sustainable annual average rate of 4% in 2013-14.
The government has ambitious plans to increase output to as much as 840m tonnes
by 2016/17 (12th five-year plan), but this looks optimistic as institutional and
bureaucratic obstacles remain. However, the government is applying increasing
pressure for a range of solutions to be foundincluding increased output at existing
mines and greater involvement of the private sector in coal extraction. This latter aim
received a blow in September 2012 with the publication of a damning report
suggesting that many exploration blocks assigned to private companies are not being
actively exploited or are suffering from huge delays. However, energy provision does
now appear to be a policy focus. Coal India is preparing plans to invest Rs75bn

(US$1.4bn) on infrastructure designed to improve and modernise coal handling. An

additional Rs70bn has been provisionally earmarked for new rail tracks.
High Australian costs suggest cutbacks in response to lower prices
Following a 5.9% fall in output in 2011 owing to weather-related supply disruptions,
growth in Australian production in 2012 should be supported by base effects.
Investment in expanding capacity was also strong in the first half of the year, including
plans to bring 8m t/y of new capacity on stream in 2012 from an Xstrata (Switzerland)
development, and 4m t/y in 2013 from a BHP Billiton (UK/Australia) project, both in
New South Wales. The Port of Newcastle is also expanding capacity. Nevertheless,
output could have weakened in the second half of the year in response to lower global
prices, high production costs and a strong Australian dollar (which was undermining
the competitiveness of mining in Australia). To help cut costs, producers including
Xstrata, BHP Billiton and Rio Tinto have announced measures such as job cuts and
delays to expansion at some of their Australian coal operations. Despite some output
cutbacks, we still expect output to continue to rise in 2013-14 at an annual average
rate of around 5%.
There are also a number of risks to continued buoyant investment in the sector in the
longer term. Australia's carbon tax, which came into effect in July 2012, could
potentially deter investment in coal, as could the recent passage of a new minerals
resource rent tax, including on coal, at 30%. Furthermore, a key producing province,
Queensland, is demanding higher royalty payments from mining companies.
The business operating environment in Indonesia is uncertain
After a strong start to the year, Indonesian coal output appears to have slowed sharply
over the course of the year as prices fell. Despite the cost advantage of Indonesian
coal (especially at the countrys larger companies) relative to other leading producers,
a number of Indonesian producers are said to have been selling below cost recently,
and there have been reports of production cuts. We expect a contraction of 5%, but
this may still be optimistic.
There is also persistent uncertainty about the operating environment in Indonesia, as
the government is seeking to guarantee domestic supply to meet the country's
growing power needs. There has been talk of a ban on unprocessed coal from 2014,
export taxes (a 20% tax on coal exports, rising to 50%, has been proposed),
production quotas and constraints on foreign ownership. As yet a formal coal policy
has not been announced and, in the past, successive Indonesian governments have
largely failed in attempts to regulate the sector. However, it does seem likely that
there will be some sort of restriction on the volume of exports, in an effort to meet
strong growth in domestic consumption. The countrys energy provider, PLN, aims to
increase electricity access to 90% of the population by 2019 from around two-thirds at
present, and expects its coal use to more than double by 2016, to almost
120m tonnes. We have maintained our forecast of Indonesian output growth in 201314 at an annual average of 5.5%.

After a bounceback in 2012, Russian output will grow steadily in 2013-14

Output in Russia was up by 7% in January-October 2012, with particularly strong
growth of 10.5% in the third quarter, according to data from the Federal State
Statistics Service (RosStat). Exports, meanwhile, were up by 18.4% year on year.
Russia's long-term coal development plans envisage a diversification away from
traditional Western export markets towards the faster-growing Asia-Pacific region.
Furthermore, the governments energy strategy to 2030 envisages substituting coal
for gas in thermal power stations, raising coal's share in electricity generation to 3436% by 2030, from 26% in 2008. However, Russian coal is costly to export owing to
the long distances to port, and again there are reports of output cutbacks in the
country in response to the fall in prices. We estimate that Russian output will have
grown by 6% in 2012, but some of this growth reflects a low base of comparison in the
first quarter of 2011, and we expect output growth to slow to an annual average of
just over 3% in 2013-14.
Prospects for South African coal output have been revised up slightly this
month
The coal industry in South Africa is facing a myriad of problems, including
infrastructure deficiencies, labour issues and regulatory obstacles that have
constrained output. The recent shooting by police of striking workers at a platinum
mine in the country, which has sparked protests at other mines, has highlighted the
troubles of the wider mining sector and the potential risk of labour unrest. The
capacity of the Richards Bay Coal Terminal, the world's largest coal export terminal,
has been expanded to 91m t/y and the rail infrastructure is being improved, but there
are questions over whether coal output can keep pace with transport capacity
additions. Furthermore, there is a possibility that exports of lower-quality coal will be
curtailed to meet growing domestic demand. The countrys larger miners benefit from
low production costs, suggesting more resilience to the current fall in coal prices.
Nevertheless, we forecast a subdued outlook for output growth, averaging 2% in 201314. We have, however, raised our estimate for output in 2012, following the release of
data showing a strong recovery in production in October after a weak first quarter. We
now expect production to have grown to by 3.3% in 2012 ( previously 1%).
Output in the EU has been responding to stronger demand
Output across the EU rose by 4% year on year in the first five months of 2012 (latest
available data), encouraged by strong domestic demand in a number of countries.
According to the latest available data for individual countries, production was up by
6.5% year on year in January-July in Germany, and by 5.1% year on year in Poland.
However, output in the UK fell by 8.2% in January-July. EU output is expected to grow
in 2012-14, but the pace of growth will slow in line with somewhat lower demand
growth.
Colombias coal output looks set to increase steadily in 2013-14
Coal output in Colombiathe world's fourth-largest coal exportergrew by 15.4% in
2011. With the prospect of rising Asian demand and the expansion of the Panama
Canal opening up Asian markets to Colombian exports, foreign companies have been

investing heavily. After a strong start to the year production is expected to have
weakened markedly in the third quarter, as a month-long strike by railway workers led
to a slump in exports. We estimate growth in output of just 5% in 2012, rising to an
annual average of 5.5% in 2013-14.
Coal: production
(mine output; m tonnes unless otherwise indicated)
2010

2011

2012

2013

2014

China

3,196

3,474

3,615

3,785

3,945

US

984

993

928

885

898

India

565

578

630

655

683

Australia

420

395

427

450

475

Russia

324

337

357

372

381

Indonesia

336

397

377

400

420

South Africa

255

255

264

268

271

Germany

184

189

202

206

210

Kazakhstan

111

116

118

121

125

Colombia

74

86

90

95

100

World total

7,244

7,666

7,884

8,142

8,447

% change

5.8

5.8

2.8

3.3

3.8

Sources: EIA; Economist Intelligence Unit.

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Stocks and prices
The coal market was in a small deficit of 28m tonnes in 2011. However, an easing of
consumption growth, combined with plentiful supply, is expected to have restored a
market surplus in 2012. Stocks in China, in particular, built over the course of 2012.
Stocks will continue to rise over the forecast period given strong supply growth.
Coal: supply and demand Balance

Production

2010

2011

2012

2013

2014

7,244

7,666

7,884

8,142

8,447

Consumption

7,253

7,694

7,848

8,102

8,361

Balance

-9

-28

36

39

86

Sources: EIA; Economist Intelligence Unit.

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Prices will move up in 2014 as global economic growth starts to pick up
Thermal coal prices were resilient in early 2012, but they fell sharply from March to an
average of US$88.2/tonne in July, as demand growth softened and supply was plentiful
from key exporters such as Indonesia, Australia and Colombia, and US supplies not
wanted at home flooded the market. Prices subsequently stabilised at around
US$90/tonne in August and September, but did not participate in the wider commodity
price rally on hopes of a further loosening of global monetary conditions. An additional
factor depressing prices was a trend whereby Chinese importers resorted to deferring
cargoes or defaulting on contracts as domestic prices fell more into line with
international trends. Prices subsequently weakened again in October and averaged
US$82.4/tonne before strengthening in November and into early December. In the light
of the demand-and-supply dynamics of the market, there seems little reason to expect
a strong recovery in prices in the coming months (barring unforeseen or weatherrelated supply disruptions, or a possible demand shock if the northern hemisphere
winter is unusually cold). However, there are signs that prices will not fall further. Coal
stocks at Chinas major power generators and ports are beginning to ease. In addition,
supply cutbacks in some major producers will help to stabilise prices. We estimate an
average price in 2012 of around US$96/tonne, down by nearly 21% from 2011. In line
with our current outlook for the global economy, annual average prices are expected
to slip again slightly in 2013, before recovering in 2014 in tandem with stronger
consumption growth.
Coal: prices
2011

2012

2013

2014

2015

1 Qtr

128.99

113.46

88.00

105.00

110.00

2 Qtr

120.00

95.54

92.00

102.00

3 Qtr

120.61

89.75

98.00

105.00

4 Qtr

114.15

85.24

100.00

108.00

Year

120.94

96.00

94.50

105.00

% change

22.2

-20.62

-1.56

11.11

Pricesa

Australian, thermal, Newcastle/Port Kembla, US$/metric tonne.

Sources: World Bank; Economist Intelligence Unit.

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