AUSTRALIAN COAL FUTURES CAN CHINA AND INDIA PROMOTE RECOVERY IN AUSTRALIA’S COAL EXPORT INDUSTRY TO 2020? Commissioned by: David Mee Date of Submission: 7 November 2016 Submitted by: Nathaniel Groeneveld UQ Supervisor: Peter Knights STATEMENT OF ORIGINALITY I hereby declare that this final thesis is my own work and that it contains, to the best of my knowledge and belief, no material previously published or written work by another person nor material which to a substantial extent has been submitted for another course, except where due acknowledgement is made in the report. Signed, Nathaniel Groeneveld ii ABSTRACT The declining price of seaborne coal since 2011 has placed enormous pressure on the Australian coal industry, slashing profits and forcing mine closures. This report aims to determine whether Australian exporters can expect a recovery in seaborne price and demand in the period to 2020. It was determined that demand from China and India would be the most important variable in determining seaborne price. Both countries are major importers pushing towards changing their energy mix. They also have access to low cost domestic coal supply and are looking for greater energy security in a tense political climate. With the viability of the Australian industry hinged on these two countries, two key drivers within China and India were found to determine their demand for coal. These were: growth in renewable energy; and availability of domestic coal. From these, a matrix of four possible export futures was produced, based on outcomes of either growth outperforming expectation or stagnation in each of the drivers. This model is based on the original scenario planning model employed by Royal Dutch Shell from late 1960’s, adjusted to allow an accurate representation of possible scenarios for Australian coal towards 2020. The futures were the coal intermediary future, the security future, the renewables future and the import future. Likely consequences of these futures were analysed and used to develop risk weightings rated at ‘low,’ ‘medium,’ or ‘high’ for both thermal and metallurgical demand from China and India. The risk weightings showed thermal coal to be at greatest risk of low future prices and reduced demand. Three of the four futures saw risk ratings of ‘medium’ to ‘high’ for Australian thermal exports. By contrast, metallurgical exports to India were consistently rated ‘low,’ leading to a more positive future price outlook. iii CONTENTS Statement of Originality ............................................................................................................. ii Abstract .................................................................................................................................... iii Contents .................................................................................................................................... iv Lists of Figures and Tables ...................................................................................................... vii List of Figures ...................................................................................................................... vii List of Tables ..................................................................................................................... viii List of Appendices ............................................................................................................. viii List of Terms and Acronyms .................................................................................................... ix 1 Introduction ........................................................................................................................ 1 1.1 Project Background ..................................................................................................... 1 1.2 Aims and Objectives ................................................................................................... 3 1.3 Scope and Assumptions .............................................................................................. 3 1.4 Methodology ............................................................................................................... 4 1.5 Significance to the Industry......................................................................................... 4 2 Project Management .......................................................................................................... 5 3 Foreign Policy Shifts.......................................................................................................... 7 3.1 Overview ..................................................................................................................... 7 3.2 India ............................................................................................................................. 7 3.3 Indian Policy Outline .................................................................................................. 9 3.3.1 The Made in India Plan ........................................................................................ 9 3.3.2 Direction of Power Mix ..................................................................................... 11 3.3.3 Coal Mining Expansion ..................................................................................... 13 3.3.4 Coal-Fired Generator Expansion ....................................................................... 17 3.3.5 Rail Expansion ................................................................................................... 18 3.3.6 Decentralisation of Power .................................................................................. 19 3.4 Indian Policy Effects on Australian Exports ............................................................. 20 iv 3.5 China ......................................................................................................................... 22 3.6 Chinese Policy Outline .............................................................................................. 23 3.6.1 Energy Demand ................................................................................................. 23 3.6.2 Government Investment into Sector .................................................................. 24 3.6.3 Direction of Power Mix ..................................................................................... 25 3.6.4 Mining Growth................................................................................................... 28 3.6.5 Steel Production ................................................................................................. 29 3.6.6 Domestic Energy Transport ............................................................................... 29 3.7 Chinese Policy Effects on Australian Exports .......................................................... 30 3.8 Technology to Impact Exports .................................................................................. 31 3.8.1 Efficient Energy from Poor-Quality Coal .......................................................... 31 3.8.2 Cost of Renewables............................................................................................ 32 4 Scenario Planning Methodology ...................................................................................... 34 4.1 Base Model ................................................................................................................ 34 4.1 Key Partnerships ....................................................................................................... 34 4.2 Key Drivers ............................................................................................................... 36 4.2.1 Growth in Renewable Energy ............................................................................ 36 4.2.2 Availability of Domestic Coal ........................................................................... 37 5 Australian Export Futures ................................................................................................ 38 5.1 Export Futures ........................................................................................................... 38 5.1.1 Coal Intermediary Future ................................................................................... 38 5.1.2 Security Future ................................................................................................... 42 5.1.3 Renewables Future ............................................................................................. 43 5.1.4 Import Future ..................................................................................................... 46 5.2 Risk Weightings ........................................................................................................ 48 5.3 Export Sensitivity Analysis ....................................................................................... 49 6 Conclusions and Recommendations ................................................................................ 52 v 7 Appendix .......................................................................................................................... 55 8 Reference List .................................................................................................................. 63 vi LISTS OF FIGURES AND TABLES LIST OF FIGURES Figure 1: Performance of the Australian coal industry since 2011 ............................................ 1 Figure 2: Electricity use versus GDP per