China factor key to global coal price evolution

Recently, the Sustainable Cities and Communities (SUC) Program China Office and the International Energy Agency (IEA) released the Coal Market Report 2017 (hereinafter referred to as the Report), which provides a comprehensive review of the development path of the global coal market and its related industries since 2017, as well as a comprehensive outlook and policy recommendations on the future development trends of the global market, especially the Chinese coal market. The Report argues that coal will still account for more than 55% of China's energy demand by 2022 and that structural reform of the supply side of the Chinese coal market is key to the evolution of global coal prices.

The Report projects that 100 million tonnes of bulk coal in industry (excluding the steel and cement sectors) and in the residential sector will be replaced by natural gas and that, combined with the saturation of heavy industrial development, projected coal demand will decline over the period to 2022, although growth in coal conversion and coal-fired power generation will continue. Even so, coal will still account for more than 55% of China's energy demand by 2022.

The Report shows that "the share of coal in the global energy mix is expected to fall from 27 per cent in 2016 to 26 per cent in 2022. "The reason for this is the sluggish growth in demand for coal compared to other fuels. Growth through 2022 is concentrated in India, Southeast Asia, and several other Asian countries. Coal demand has declined in Europe, Canada, the United States and China, by far the largest coal consumer, and the Report forecasts a slow structural decline in its coal demand, accompanied by some fluctuations related to short-term market demand. As a result of these contrasting trends, global coal demand reaches 5.53 billion tonnes of standard coal in 2022, just slightly above current levels.

The Report suggests that a competitive, economically efficient and safe coal mining industry is vital to China's economy. Ensuring the economic efficiency of the coal industry and the safety of coal mining is a near-term policy priority, while the competitiveness of the sector is another medium-term goal in order to avoid making it a drag on China's economic development. But cutting costs is extremely challenging. Closing or consolidating inefficient coal mines and easing coal transportation bottlenecks can reduce costs to some extent, but will be offset by deteriorating resource conditions, rising labor costs and increasing transportation distances. The problem of overcapacity needs to be addressed, and the local impact of social issues such as coal mine closures and unemployment cannot be ignored.

Beijing Low Carbon Clean Energy Institute Professor Tian Yajun, on the other hand, believes that for China, since the 19th National Congress, in the overall requirements of environmental protection, the future development trend of coal will tend to saturate or even slowly in the process of decline, but, in the current process of rapid change, the demand for coal is still relatively strong. He suggested that the government, research institutions and other departments should establish big data on energy, and analyze and mine it to provide scientific guidance on energy transition.

The Report concludes that price volatility will continue. Given China's huge size and dominant position in the global coal trade, changes in both the policy and economic environment could exacerbate volatility in the global coal market. This volatility is also amplified when combined with supply disruptions. Coal prices will continue to depend heavily on China; therefore, supply-side structural reform of the Chinese coal industry is key to the evolution of coal prices. Among exporters, Indonesia deserves particular attention, with expanding domestic demand, coupled with constraints on increased production, likely to increase market tightness and thus push prices higher. On the demand side, import levels in China, India, South Korea and Japan are key uncertainties.

In this regard, Wang Zhixuan, full-time vice president of the China Electricity Council, said that Chinese coal prices have a great impact on world coal prices, of which there is a market role, but also by China's production capacity and other policies. First of all, coal is still a major source of energy in China, both now and in the future, and such a trend will not change within 20 years. Second, coal power remains an important support for China's power transition and energy transformation. In his view, at present, issues such as how to speed up the coal-power linkage mechanism and the government's comprehensive coordination mechanism should be dealt with.

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