Weekend Reads | Understanding Coal

by Kevin Schofield

I thought I understood coal, until I came across this weekend's read: the International Energy Agency's analysis of the global coal market and forecast for the next three years. I believed the consumption of coal was declining worldwide, especially in the larger and developed nations, as part of an effort to switch to natural gas and renewable energy sources. Not only is that not true, but the truth is far more complicated.

Coal is consumed for three purposes. First, power generation: It's burned to fire large generators that create electricity. Second, heating: It's burned in furnaces to heat homes, commercial and industrial buildings, kilns, smelters, and other manufacturing processes that require high heat. Third, metallurgy: It's used to make nickel, steel, and other alloys. Globally, two-thirds of coal is used for direct power generation; one-fifth is for heating; and one-eighth is for metallurgy. But the amount of each varies by country.

China is by far the largest consumer of coal, using more than half of the total global amount. Over the past 20 years, as its economy has rapidly expanded, China tripled its annual coal consumption. But China's economy is slowing down, and some believe the country may have finally reached "peak coal" and will start to see declines over the next few years, especially as investments in renewable energy spin up.

India, on the other hand, the second-largest consumer, is the country driving growth in coal consumption: It increased 9% in 2022 and another 9% last year. Three-quarters is for power consumption, and nearly all the rest was used to create cement, iron, and steel for the nation's large-scale infrastructure investments. It is projected to continue to grow its use of coal in the next three years.

Here in the United States, coal use is in rapid decline. Twenty years ago, we were the second-largest coal consumer; India passed us about 10 years ago, and we continue to drop down the list.

Today, nearly all coal use in the U.S. is for power generation, but coal generators are continuing to be taken offline (replaced by natural gas generation or renewable energy), and by 2026, coal is expected to represent only about one-eighth of the country's power-generation capacity.

Coal's use in the European Union is weird. It had been trending down — again, being replaced by gas and renewables — until Russia invaded Ukraine. Sanctions against Russia have all but completely stopped Russian gas flowing to the EU, and particularly during the difficult winter Europe experienced a year ago, some countries at least temporarily expanded their coal generation as a replacement for Russian gas. That seems to be receding now, as EU countries have found other sources for natural gas.

And then there's Indonesia, which is building new coal power-generation plants to feed their nickel, cobalt, and aluminum smelters. Nickel is used both in steel and in making batteries, both of which are in high demand. Indonesia is the world's largest nickel producer.

So, where is all the coal coming from? That's an equally complicated story. It's probably not surprising to learn that both China and India are ramping up their own domestic production while also buying large quantities from other countries. China mines about half the annual global production, almost entirely for domestic consumption, but it has two problems. First, the coal is in the wrong place: It's produced in the western part of the country, but most of it is consumed along the eastern coast — and it's expensive to transport. Second, over time, the quality of the Chinese-produced coal has declined — it produces less energy when burned — so more of it is needed to accomplish the same result. Because of these issues, China continues to import a large amount of coal: In some cases, they can get it better quality and cheaper by buying it from other countries. Strangely, that also means they have a glut of domestically produced, lower-quality coal.

India has ramped up its domestic production to decrease its foreign dependency, increasing it by 20% in 2022. Coal production is dominated by two state-owned companies, though several years ago, the government began opening up coal mining to private industry.

Indonesia increased its coal production by a whopping 20% in 2022; 30% is used domestically, and the rest is exported. Indonesia is the world's largest coal exporter by far.

Russia has read the writing on the wall and shifted the emphasis for its coal production farther east, recognizing that China, its next-door neighbor, is the biggest market in the world, and that the EU isn't going to come begging for Russian coal anytime soon. In fact, it is building new overland transportation routes to increase coal exports to China (instead of shipping coal by sea out of Russia's eastern industrial ports).

Australia's coal production dropped by a few percentage points in 2022. There were a number of factors: adverse weather, declining domestic consumption, political pressure on environmental issues, and China's ban on importing Australian coal. Despite China's ban being lifted last year, Australia's production is predicted to continue to decline for the same reasons listed above — and because Russia's coal is cheaper.

And here in the United States, coal production declined 10% last year after a 3% increase in 2022. About 6% of U.S. coal production is exported, mainly to India and the EU, but as local consumption continues to decrease, the amount exported is expected to grow.

As you can see, the situation is very complex, with more than a dozen countries as major players in the global coal market trying to cover their domestic consumption or export to other countries. The 130-page report also dives into the ups and downs of coal pricing, with the Ukraine war, COVID-19, the rise of renewables, supply chain disruptions, and government royalties all significant factors. It also discusses the profitability of coal producers (spoiler: their profits are "unprecedented" due to recent price spikes), and maps out the trade flows for coal around the globe.

Sadly, from a global perspective, we don't seem to be making progress on reducing coal burning, which would help reduce our climate impact. Locally, the U.S. seems to be doing its part (though it still needs to address its reliance on natural gas), but China has just hit its peak and India is still growing its coal consumption.

Coal 2023: Analysis and forecast to 2026

Featured image via Nneirda/Shutterstock.com.