European countries are still a major market for many coal exporters around the world, resulting in a large number of Europe’s ports handling substantial volumes. In recent years though, annual quantities imported have declined greatly, and the downwards trend evidently is continuing in 2019. A further weakening in the future seems likely, amid sustained pressure from energy policy influences focused on decarbonization which are progressively diminishing the role of coal.
Coal imports into the European Union still comprise about one-tenth of the entire global seaborne market, despite the ongoing weakening trend. Over two-thirds of foreign supplies is comprised of steam coal, used mainly in power stations. Coking coal used by steel mills comprises the remainder. Negative influences affecting coking coal imports are limited but, by contrast, support for steam coal imports is being rapidly withdrawn as the shift towards cleaner energy sources gains momentum.
Among individual European importers, Germany’s large market is dominant, contributing almost one-third of the overall volume. Other major buyers — France, Italy, Netherlands and Spain — together have a two-fifths share. Until a dramatic fall occurred a few years ago the United Kingdom also was in the major importers league. Since then, the UK has been a much smaller player. Several relatively minor importers comprise the balance.
Economic activity drivers
Broad macro-economic trends affecting energy demand in the EU are still influential, although policy developments directly affecting coal consumption and imports are often a more prominent focus of attention. Expectations of an economic growth revival persisting last year proved too optimistic and, as 2018 unfolded, activity slowed. Stronger headwinds have emerged in the past twelve months, resulting in forecasts of a further weakening in 2019, with only limited signs of an upturn emerging next year.
According to the latest world economic outlook update published by the International Monetary Fund, gross domestic product in the eurozone countries group may grow by a low 1.3% in 2019, after decelerating to 1.9% last year. If this prediction proves accurate, it will be the region’s most sluggish expansion since five years ago.
The IMF suggests that eurozone growth “is expected to pick up over the remainder of this year and into 2020, as external demand is projected to recover and temporary factors…continue to fade”. However, such a positive view results in only a 0.3 percentage points improvement in the forecast GDP increase to 1.6% next year.
A subdued growth performance has led the European Central Bank to consider another round of monetary policy easing — cutting interest rates and restarting the bond-buying programme — and there have been calls for a greater contribution from fiscal policy measures to support economic activity. During recent weeks the outlook deteriorated. The ECB argued that more stimulus is needed because data and forward-looking indicators showed no convincing signs of a rebound emerging in the near future, and the balance of risks remained tilted to the downside.
These variations in the rate of economic growth have implications for energy consumption, and coal usage specifically. Production levels in industries using coal indirectly through electricity consumption, or directly in steel manufacturing and some other manufacturing processes, is determined by wider trends in the economy.
In 2018 coal imports into the European Union resumed a downwards trend after stabilizing in the previous twelve months. All the major individual importing countries recorded decreases, and that pattern seems to be persisting, probably resulting in another overall reduction in 2019 as a whole. Moreover the longer term trend appears negative as well.
The EU’s seaborne imports of coal in 2018 totalled 136.9mt (million tonnes), a reduction of 8.4mt or 6% compared with the previous year, based on data compiled by Clarksons Research, which is summarized in the table below. The 2017 total of 145.3mt was just above the 143.9mt seen in 2016, both figures being well below earlier annual volumes. Germany, France, Italy and Spain saw especially notable reductions last year.
Within the coking coal segment, EU imports have been relatively stable in the past few years. The 2018 volume of just under 40mt was similar to that seen in the previous twelve months. In the larger steam coal component the 2018 volume was down by almost 9mt or 8% at 97mt, from 106mt in the preceding year. Coking coal, required by the steel industry, is more difficult to replace with alternative energy sources than steam coal in power stations, where gas-fired power generation or displacement by renewable energy supplies can be substituted.
A large proportion of overall EU coal imports weakness in the past five years was contributed by the reduced UK purchases. Over two-thirds of the net reduction in annual EU seaborne imports in that period reflected deleted UK volumes. The remaining one-third reflected varying performances in other countries, some of which saw broadly flat trends from 2014 to 2018.
Variations among importers
Even though its annual volume has diminished, Germany has remained by far the largest European coal importer. Five years ago in 2014 seaborne steam and coking coal received by German buyers totalled 53.0mt, as shown by the Clarksons Research data, which comprised 29% of the EU quantity. The total declined by 9.3mt or 18% to 43.7mt in 2018, comprising a slightly larger 32% proportion of EU regional quantity.
In Italy another notable coal import decline of 5.3mt (27%) occurred over the same period from 2014 to 2018, from 19.4mt to 14.1mt. An accompanying decrease in Netherlands was smaller, a decline of 11% from 15.8mt to 14.1mt. Spain saw a 4% decrease during the five years period to 15.0mt, while in France the reduction to 12.7mt was similar at 3%.
Plummeting import demand in the United Kingdom has been the most spectacular change in recent years, although there was a partial recovery in 2018. From a peak 45.3mt in 2013, imports by UK power stations, steel mills and other coal buyers halved to 21.9mt in just two years before falling to 7.4mt in 2017 followed by a pick up to 9.2mt last year, about 80% below the peak volume. This trend reflected extensive coal-fired power station closures amid a rapid shift towards alternative fuels and renewable energy supplies, especially wind-generated electricity.
Among negative pressures on coal demand in the UK, increased use of biofuels for power generation has become a feature. Several coal plants have been converted to use biomass. Support is provided by the government, paying a premium price above market prices for electricity generated. The biggest user, in the form of wood pellets, is the mega-size formerly entirely coal-fired Drax power station, where four generating units comprising two-thirds of the plant have been converted for biomass.
Domestic coal production changes in the EU are having a more limited impact on import demand. Output has diminished in most producing countries, as a result of many mine closures and in several countries coal output has been greatly reduced. Mining is now concentrated in Germany and Poland. Both countries have extensive lignite or brown coal production which is not generally traded internationally.
Figures published by Euracoal, the European Association for Coal and Lignite, show that in 2018 Germany mined 166mt of lignite plus under 3mt of hard coal. Poland’s production of these categories totalled 59mt and 63mt respectively. In the UK hard coal output was small at under 3mt and it was also below that figure in Spain. Reductions in hard coal output over the past five years were seen mainly in the UK and Germany.
Changes in coal consumption trends have been the main influence affecting European countries’ purchases on the international market. Steel mill consumption of, and import demand for, coking coal broadly reflected steel production progress and remained fairly flat. In the steam coal sector energy market developments mostly driven by government policy decisions were the biggest factor influencing coal use and imports.
Extending the ‘European’ area geographically, annual imports of coal into Turkey have risen in the past five years by about 9mt, to reach a total of 26mt in 2018 when the annual growth rate was 4%. About three-quarters of the total is steam coal, mainly supplying power stations. Trends in electricity generation and steel production have supported this expansion.
Impacts of policies
Across the European Union a long-established governmental policy priority has sought to promote cleaner energy resources. This aim involved phasing-out large scale coal-fired power stations. As a substitute gas-fired units have been built and, especially during the past few years, there was an accompanying more decisive move towards renewable energy, with wind power generation becoming a feature.
Coal now has a less prominent share of electricity generation within the EU. According to calculations by the Oxford Institute for Energy Studies, in 2017 coal’s share was 20%, slightly below the 21% share for natural gas generation and 22% for nuclear generated electricity. Hydro-power contributed 16%, while the proportion generated by renewable energy sources was 18%.
Policy measures agreed by European Union members affect coal use through the Emissions Trading Scheme, air pollution directives and renewable energy targets. The key driver has been a focus on sustainability, mitigating climate change in particular, accompanied by more attention to aspects such as energy security and industrial competitiveness. Power sector decarbonization is a target. But the EU still has numerous import-dependent coal-fired power plants operating, ensuring in the short to medium term a substantial market for steam coal (and for the low-grade domestic lignite which some power stations use exclusively).
There is a move away from coal-fired power generation, with several coal plants now converted to use biomass.
Reports suggest that many European coal-fired power plants may close when confronted by tough new emissions reduction requirements. Several EU member countries have revealed plans to cease power generation from this sector by a set date during the period up to 2030. In France, Italy, Netherlands and UK target deadlines have been announced within the 2022-2029 period. In Germany, which has the largest sector, a later target date of 2038 for phasing out electricity generation from hard coal and lignite has been proposed.
The falling cost of renewable energy is now a prominent driver, reflecting commercial influences rather than regional policies. Perceptions of future energy supplies are being altered by improving wind and solar power efficiency and economics. However, for a number of countries, a programme of closing coal-fired plants is a longer-term process. Alternatives on the extensive scale required are likely to take many years to install.
Premature coal plant closures could cause disrupted power supplies leading to economic and perhaps political problems.
Recently it was reported that government efforts to ensure closure of the most polluting power plants are being assisted by commodity market pricing this year. Lower natural gas prices on the international market, combined with the increasing cost of releasing carbon dioxide emissions have reduced the profitability of using coal to generate electricity. An abundance of cheap gas and higher EU carbon allowance prices boost the economics of coal-to-gas switching.
Indications for the EU’s seaborne coal imports in 2019 point to a reduction of perhaps 11mt or 8%, from the 137mt total seen last year to about 126mt, as shown in the table. Bulk Shipping Analysis provisional calculations also suggest that the downwards trend may continue next year. Although changes in individual future years could be up or down, there are no signs of any influences which could result in the downwards trend reversing except temporarily.
For Germany, an estimate by the country’s importers group VDKi was reported a few weeks ago. This association predicted that hard coal imports into Germany during 2019 could be around 10% below the 46.7mt total (a figure which is mostly, but not entirely, seaborne movements) seen last year. The reduced volume this year was estimated to be within a 39–43mt range. Strong competition in the power generation market from renewable energy was cited as a key reason explaining the negative outlook, coupled with slack demand from steel mills. The prediction reinforces expectations of an EU-wide decline in imports.
This essentially negative outlook has implications for the future trend in global seaborne coal trade as a whole. Together with clear indications of limited prospects for further growth in the dominant Asian market, receding import demand in Europe potentially could cause annual world coal movements to flatten or start declining.
Inevitably estimates of the pace of decline in EU coal imports in the immediate future and later involves guesswork. The precise consequences of developments in all the individual countries are not easily predictable. When standard commercial aspects are accompanied by heavy political pressures, with effects that are difficult to foresee except as a general pervading influence, forecasts become especially tentative.
Source: Richard Scott, Bulk Shipping Analysis