Is China Big Coal's Cash Cow? Maybe Not

China's appetite for energy may be ravenous, but increasing domestic supply could mean U.S. coal suppliers get the slip.

A worker reinforces a plank in a pit at the Moxinpo Colliery in Chongqing, China, Nov. 21, 2007. According to state media, accidents in China's coal mines claim over 5,000 lives each year.
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Although China's ravenous appetite for energy continues to grow, the East Asian nation might not be the limitless cash cow Big Coal was hoping for according to a new study.

Recent research from analytics firm IHS CERA shows that while China gobbles up about as much coal as the rest of the world combined, demand for the fuel will peak before the end of the decade and decline steadily through 2035.

"Many companies that have targeted China as their strategic supply region in the long term may need to rethink that strategy," said Xiaomin Liu, an associate director of IHS CERA, in a statement. "Some international suppliers will be able to compete effectively, but others will struggle to find a competitive edge as China's market becomes ever more liquid."

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Part of the reason China's coal import needs are changing has to do with an effort to ramp up the nation's mining sector. According to the CERA report, China's coal production capacity has jumped nearly fourfold during the past decade. While transportation and other infrastructure issues have limited China's ability to move resources to demand centers in the past, bottlenecks are now being addressed which will ease supply and demand pressures in the country.

Just as in the United States, natural gas is also expected to play a major role in China's energy mix in coming years. Analysts have said China could have some of the largest reserves of natural gas trapped in shale formations in the region, and development of those resources could begin as early as 2020. Increased use of natural gas in electricity generation could push down demand for coal imports, as coal power plants are traded out for cleaner natural gas fired plants.

But not everyone thinks China's coal demand is suddenly going to fall off within the decade, and even if it does decline, there are several other lucrative markets for U.S. coal suppliers to tap into, including India and Europe. In fact, according to a recent report by the International Energy Agency, coal demand is growing everywhere except the United States.

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"We have not yet seen any persuasive evidence that China's demand is going to fall off," says Luke Popovich, spokesman for the National Mining Association. "China is underreporting its need for urbanization and the infrastructure surrounding it, which includes electrification."

Although China is ramping up nearly every energy sector to meet voracious demand, coal is still one of the cheapest ways to generate electricity, Popovich says, and with the massive scale of urbanization in countries such as China and India, cost is still very much a factor.

Europe, too, is facing challenges when it comes to balancing the benefits and costs of renewable energy sources with more traditional, but dirtier sources such as coal. In the wake of the Fukushima-Daiichi nuclear disaster in Japan, plans for expansion of nuclear power in Europe have been put on hold indefinitely in some cases, which has fueled a spike in coal use in the region, according to exports.

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"It's certainly a shift away from renewables and nuclear power is out of favor in Europe," Popovich says, and with countries such as Germany putting less of an emphasis on renewable sources, coal is set to be a big player in the continent's energy mix in coming years.

"Natural gas is extremely expensive in Europe as opposed to the United States," Popovich adds. "They want to lessen their [energy] costs because European industries are telling their governments, 'We are going to be uncompetitive with the United States, for example, if we don't lower our energy costs.'"

Market conditions like these, in addition to IEA projections that coal is fast becoming the world's top energy source, almost ensures a place for the much-maligned resource in the world's energy mix. While potential regulations are expected to severely dampen the use of coal in the United States, with massive markets such as India and China hungry for ever-increasing amounts of energy, America's coal suppliers have a multitude of potential markets on which to capitalize.