China Lights, Global Floods, Australian Coal

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Includes: AAUKY, BTUUQ, EWA, FXI, KOL, OIL, RIO
by: Gregor Macdonald

One detects a slow, ironic hooray welling up from the climate change community this week because after a year of intense weather that’s devastated food crops worldwide, now an epic flood in Australia threatens to cripple the production of coal. Accounting for 30% of global energy supply–and ready to go higher as oil supply declines–coal was thought to be permanently relegated to the 19th century only a decade ago. Now, however, coal is the go-to energy source of the developing world, the 5 billion people now passing through the gears of industrialism. And Australian coal, both thermal and metallurgical, is called upon heavily to feed this soaring demand. But as flooding in Queensland, Australia’s northern coal country, spreads over an area as large 350,000 square miles, what will happen to coal production and the export of coal?

One country asking that question today is China. Over the past 10 years developing world coal-consumption growth has been rising by nearly 7.5% per year. The majority of that growth has come from China, which uses metallurgical coal to make steel and thermal coal to stay warm, and keep the lights on. This NASA Earth Observatory shot (shown below, click to enlarge) was taken just last week, and covers the Beijing-Tianjin axis. The 35-40 million people here under the gaze of NASA’s satellite are drawing their electricity from coal because that’s what powers China. Not oil, not solar, not wind, but coal.

Over 70% of China’s economy is funded by coal energy. Moreover, if developing world coal demand growth is advancing at nearly 7.5% per year, then obviously that makes for a doubling of coal demand every ten years. And that’s exactly what took place over the past decade. Can China and the other emerging markets double their coal consumption a second time, this coming decade? The nightmare of a world transitioning back to coal is no longer just a subject for discussion at Copenhagen, or Cancun. It’s not just climate change activists who are alarmed by the heady production of worldwide CO2, or the extreme weather events now associated with global warming. Munich Re reported on Monday that 2010 was one of the most loss-intensive years since 1980, for natural catastrophes. More importantly, landslides, storms, super-fires, and floods featured prominently in the details of the Munich Re report.

And now comes the Australian flood. Like a film released too late for consideration in the 2010 class of catastrophes, the massive deluge which will not only affect coal exports but also wheat supply will no doubt feature prominently in Munich Re’s 2011 report next year. Below is just a detail of the massive Bowen Basin, capturing some of the big export facilities from Abbot Point to Dalrymple Bay. Coal observers, and coal investors, will know that Australia has been going through an infrastructure upgrade cycle the past ten years that has significantly boosted the volumes from this coast. But that is not going to be of much help now, as companies from Rio Tinto (NYSE:RIO), Peabody (BTU), and Anglo-American (OTCPK:AAUKY) have declared force-majeure on coal shipments, and the list is growing.

Concern is no doubt growing across Asia. Coal prices were already in a strong upswing the past six months prior to this event. Worse, pressure had been forming in China’s power sector since late Autumn, driving small industry owners to fire up their diesel generators which triggered a knock-on effect to global distillate prices. Cold, northern-hemisphere temperatures have further aggravated the situation driving the price of European Gasoil to recent highs, along with Brent oil. In other words, both the developing world–hooked on coal–and the developed world with its leverage to oil are now in this together. Even the normally complacent IEA in Paris is raising its voice, now admitting the new levels in oil prices are a threat to a recovery.

The points of contact between global coal and oil, therefore, are a bit more numerous than most might imagine. Not only did a crimp on electrical power in China drive demand towards diesel, but the Australian floods are going to pressure both thermal and metallurgical coal as users will be more flexible–in the face of pressured supply–how they use the two grades. Already, NYMEX thermal coal (CAPP) contracts have risen from 71.00 towards 80.00 in the past two weeks. Pressure on thermal coal will only add to pressures on global distillate prices. And so on. What’s more intriguing to speculate now, given that rising oil and coal prices are a given into Spring, is the broader question: how frequently in the future will energy extraction be impaired by global warming?

Images: NASA Earth Observatory: Cities at Night, Northern China, December 2010. H/T to @maoxian who sent me the photo, and remarked he was thinking of coal when he saw those lights. | The Government of Queensland–>Queensland Coal Maps: Central Queensland coal mines and identified deposits (PDF, 135 kB).