China war on smog seen dooming coal amid 'cheap but dirty' purge

[BEIJING] China's battle against pollution is threatening the recovery of coal prices from the lowest level in almost nine years.

Installations of new coal-fired power capacity in the world's biggest polluter are set to halve as "cheap but dirty" plants get eliminated, according to Bloomberg New Energy Finance. Prices of China's benchmark power-station coal have tumbled 59 per cent from a peak in July 2008, and none of five analysts surveyed by Bloomberg predict a recovery.

China is turning to alternative energy sources as it races to meet emissions targets and eradicate the smog that's enveloped cities and become a major cause of social unrest. President Xi Jinping has vowed to punish "with an iron hand" those who destroy the environment and his government is abolishing outdated capacity in the most polluting industries while promoting the use of electric cars and solar rooftops.

"Coal-fired power demand is being displaced by renewables including hydro and nuclear," said Li Rong, an analyst at Wood Mackenzie Ltd, an Edinburgh-based energy consultant. "Demand from non-power sectors is also weak, especially as combating pollution pressures industries like steel and cement. These will keep coal prices sluggish."

The weekly average price of power-station coal at Qinhuangdao, the nation's biggest port for delivering the fuel, fell to 405 yuan (US$65) a metric ton as of May 17, data from the China Coal Transport and Distribution Association show. That's the lowest level since July 2006 and down from a record 995 yuan. None of the five analysts in the Bloomberg survey forecast prices to climb above 500 yuan before 2020.

Last year, the amount of electricity generated by coal- fired plants declined for the first time since 1974 while output from non-fossil fuel sources, including hydro power, wind and nuclear, rose about 20 per cent, according to the China Electricity Council. Mr Xi set a target in November to cap carbon emissions by 2030.

About 3 gigawatts of new coal-fired capacity will be brought on for every 1 gigawatt that will be retired from 2015 to 2020, compared with a ratio of 6 to 1 in the five years through 2014, said Sophie Lu, an analyst at Bloomberg New Energy Finance.

Electricity generated by hydro and nuclear cut coal consumption at thermal power plants by as much as 110 million tons last year, according to Wood Mackenzie.

Demand for coal is also declining as growth slows in the world's second-largest economy. Gross domestic product grew 7 per cent in the first quarter, after climbing 7.4 per cent in 2014. That compares with growth of about 10 per cent a year from 1990 to 2012.

Thermal power plants operated last year at the lowest level since 1978 and utilisation rates, the leading indicator of coal demand, may decline further in 2015, according to the China Electricity Council. These facilities used 1.25 billion tons of the fuel in 2014, down 7.4 per cent from a year earlier, data from the Council show.

The China National Coal Association estimates that more than 80 per cent of the country's producers are losing money. Investors should "steer clear" of coal miners including China Shenhua Energy Co, China Coal Energy Co. and Yanzhou Coal Mining Co, amid "intense demand destruction," according to Jefferies Group LLC.

"Coal demand in China has peaked," said Laban Yu, a Hong Kong-based analyst at Jefferies. "It went down last year, it's probably going down even more this year. Coal prices will never recover, ever."

BLOOMBERG