Coal's Great White Hope: Indonesia


How many times in the past day, month, year, have you read the headlines that salvation lies ahead?  From a strictly economical point of view -- your theological beliefs being your own -- it's a common refrain to announce in the middle of particular unpleasant news that the bright light at the end of the tunnel lies just around the corner and is particularly bright.  The coal industry has been offering a variety of such salvation promises to any investors willing to listen for the past four years: zero-carbon coal, mountaintop blasting, no-dust coal.  Skeptics and timid investors may have long ago divested themselves of coal, having lost the patience for a commodity that's lost value five years running.  For those not too jaded by coal, return once more down the rabbit hole to the newest salvation for this fossil fuel: seaborne trade to Indonesia. 

The First Hope: China

For the better part of a decade, coal producers knew that no matter how much fuel they mined from the ground, the Chinese economic boom would snap up all available supply.  While China remains by far the largest coal consumer on our planet, eating as much of the fossil fuel as every other nation combined, their consumption rate has slowed after hitting the marker of three billion tons per year.  As China also produces more coal than any other nation, generating nearly half the entire global output, their seaborne trade makes a great deal of difference to overseas producers.  Yet China hasn't had a great 2015 by their lofty standards of consumption: Beijing rocked the commodities world in March by announcing that they would further curb their coal import after the total imported figure dropped by a third in 2014.  While China relies on coal for two-thirds of their power needs, they've weaned themselves off of nearly fifty percent of the total coal used in the past year; if that trends holds up for the rest of 2015, it'll be their lowest consumption in the past decade.  Only a few years ago, forecasters said China would need to import a billion tons of coal per year, or around a third of its total use.  Today, however, it appears that China may not need to import much at all.  Ten percent less imported coal means major disturbances for the international market, with the desperate urge for coal producers and coal investors find as large a consumer as the former giant. 

Take Two: India

The second-largest importer of coal, India, has precious little fossil fuel of its own and questions about the available supply of coal.  India burns nearly nine percent of the world's total supply of coal while only mining about seven percent of global supply.  2015 has been a banner year for Indian coal, on pace to import just under a billion tons by the conclusion of December, by far the largest quantity of seaborne coal coming in throughout the nation's history.  Rather than settle for good enough, however, the state-owned Coal India Limited has pushed for a significant boost for coal exports and a significant reduction of coal imports, hoping to double exports that current stand at 500 million tons.  With India, much like China, restricting the amount of seaborne coal coming in, the commodity badly needs a new, lucrative, coal-poor customer.

Indonesia: Third Time's The Charm?

All eyes in the coal world have now settled in Indonesia after the government declared that they would add some 35 gigawatts of power to their grid by 2020, nearly doubling the current consumption.  Indonesia expects twenty of those gigawatts to come from coal-fired plants, meaning that the world's seventh-largest producer of coal will need to import seventy million more tons of coal per year.  That figure would certainly offset the deficits in China and India, providing coal with the necessary demand to cause it to rise back above the $50 per ton figure that we haven't seen in nearly a full year.  Yet for all the roses of Indonesia, investors need to be wary of a significant quantity of thorns.  This isn't the first time the government has set lofty standards only to come up short.  An Indonesian energy initiative in 2004 could only deliver about three-quarters of the goal figure; a previous initiative in 2002 hit only ten percent of the goal.  There's some good news: their current operations will take the construction of new plants out of the hands of the state-owned energy concerns, relying on private funds instead.  Investors may not want to hitch their portfolio to the Indonesian economy, but some statistics indicate that coal may be nearing the end of its long, painful bear market.

Running On Empty

The International Energy Agency believes that the poor prices that coal fetches on the market today will lead to a huge deficit in the next five years.  With an average economic growth rate of 3.4%, the IEA predicts that coal will rise to over $100 per ton by the end of 2020, at which point India will lap the United States as the world's second-largest coal consumers.  Production growth peaked three years ago, leaving many coal companies shutting down mines and limiting the available supply.  What's more, the outlook looks better the further you go: by 2040, demand will rise by fifteen percent more than the current available global supply, sending prices upwards unless large-scale operations add major inventories of fresh, high-quality coal onto the market -- a prospect that remains entirely theoretical as of today.  Buying into coal at 2015 prices and selling in the long run represents a fantastic growth opportunity as depressed prices result in reduced output while demand scales far ahead of supply.  It's not a prospect for overnight growth, however, and requires significant patience over the course of years for investors who can wait for a rough bear market to return back to a booming bull market.  

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