Thursday 16 July 2015: Key half-year statistics released this week by China’s National Energy Administration show the continuation of a major electricity sector transformation in the country, with profound ramifications for Australia’s coal export industry, according to the Institute for Energy Economics and Financial Analysis (IEEFA).

While electricity demand grew 1.3% for the first six months of 2015, year on year, China’s coal consumption dropped 5% for the corresponding period, building on the 3% decline reported in the full year of 2014.

“China has decoupled economic growth from coal usage,” said Tim Buckley, Director of Energy Finance Studies at IEEFA. “These new figures starkly demonstrate once again that while electricity demand continues to rise and GDP remains at a level which would turn any western treasurer green with envy, coal consumption continues to rapidly decline as the country focuses on shifting to an ‘everything but coal’ energy mix.”

Thermal coal consumption in China peaked in 2013 and is on track to decline by 155 million tonnes (Mt) in 2015 on top of the 95Mt decline reported in 2014. Utilisation rates for thermal-fired power stations declined from 54.2% in the first half of 2014 to a record low of 49.3% in the first half of 2015.

Meanwhile, wind farm electricity generation was up 29% year-on-year (yoy) for the half year on the back of 22GW of new wind farms being installed in the past 12 months. Hydroelectricity production is up 12% yoy with 15GW of new hydroelectricity capacity commissioned over 2014/15. China has additionally added 4.4GW of nuclear and 12GW of large scale solar in the past year.

“The news for countries exporting coal is gloomy,” said Buckley. “Of the coal which continues to be used, it’s no surprise that China has moved to protect domestic production. Imports in the first half of 2015 were down 38% yoy, on track to decline by over 80Mt yoy in 2015; a number almost double the combined increase in demand for thermal coal imports from India and all of South East Asia expected this year.”

The 5% decline in China’s thermal coal demand in the first half of 2015 will inevitably be a major point of discussion at China Shenhua Energy Corporation, owner of the recently approved Watermark mine in Australia. Shenhua has cut its coal imports to zero over 2015 in order to limit the erosion of demand for its highly profitable domestic coal mining operations. So in upcoming meetings, the board will have to weigh up the A$700m sunk cost of its Watermark project relative to the decision to sink another A$1bn into a potentially stranded asset with high external transportation costs.

“As a vertically integrated coal-fired power company, Shenhua is operating on 100% domestic sourced coal already so clearly does not need Watermark for blending. If it does proceed with this project, in all likelihood Shenhua will end up having to close existing Chinese coal mines to accommodate this excess supply in a declining market,” said Buckley. “The commercial decision to walk away from yet-to-be started Watermark looks compelling.”

According to IEEFA, the latest Chinese data reflects a significant focus on reducing the energy intensity of demand and the structural shift of Chinese economy away from sectors like construction towards less energy intensive service and consumer areas.

This structural change is very clear in that heavy industry electricity demand declined 0.9% yoy in the first half of 2015 where as tertiary demand increased 8.1% yoy and residential demand was up 4.8% yoy. So within the 7% GDP growth aggregate, heavy industry is declining, consumer and service industries are reporting strong growth.

“The nexus between economic growth and coal usage in China has been cut,” said Buckley. “Month after month, year after year, the figures tell the same story, China is rapidly ceasing to be an importer of seaborne thermal coal. With India now firmly embarked on a similar electricity sector transformation, the message to investors is plain: this is a sector in structural decline.”

About IEEFA

The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy and to reduce dependence on coal and other non-renewable energy resources.

More here on IEEFA research: http://ieefa.org/category/subject/reports/