THE CHANGING INTERNATIONAL COAL MARKET: TRADE PROSPECTS AND ENERGY SECURITY IMPLICATIONS

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• Publication Date: September 1, 1984
• Content Type: REPORT

The Changing International
Coal Market: Trade
Prospects and Energy
Security- Implications
GI84-10156
September 1984
442
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~. vuccmIdtV vI
m
e tgence
n
The Changing International
Coal Market: Trade
Prospects and Energy
Security Implications
This paper was prepared by ffice
of Global Issues. Comments and queries are welcome
Conf idential
G! 84-10156
September 1984
 Approved For Release 2009/02/05 : CIA-RDP85SO0315R000200100002-8
Coal Market: Trade
Prospects and Energy
Security Implications
Key Judgments The international coal market is not developing as rapidly as most experts
Information available expected just two to three years ago. According to our analysis, Organiza-
as of 15 August 1984 tion for Economic Cooperation and Development (OECD) coal consump-
was used in this report.
tion during the 1980s is likely to grow by only about one-third the amount
government planners predicted in 1982. Although coal already can be
delivered to Western Europe and Japan at about half the cost of oil or nat-
ural gas, slower-than-expected growth in electricity demand, declining oil
prices, environmental concerns, and the high capital costs of switching to
coal are major impediments to increased coal use.
Prospects for substantially slower growth-particularly in Western Europe
and Japan-have sharply diminished import requirements at a time when
expansion programs in the major coal-exporting countries will result in
significant additions to coal-export potential. This dim outlook for the
international coal market has major trade and energy security
implications:
? The United States will be hard pressed to increase coal exports during
the 1980s.
? Lower-than-expected growth in coal use could result in greater oil
consumption, increasing Western dependence on the volatile Persian Gulf
region.
? Failure to switch to coal could lead to increased West European demand
for gas and improve prospects for additional Soviet gas sales.
? Intense competition among coal suppliers in the next few years may also
weaken the confidence needed to support the large-scale investment that
will be required to cover the substantial growth in coal consumption
expected during the 1990s.
Measures to expand OECD coal consumption during the remainder of this
decade would require incentives to industry to offset the high capital costs
of converting to coal in addition to research and development into methods
to burn coal more effectively and cleanly to meet growing environmental
concerns. With the United States accounting for more than one-fourth of
world coal reserves and ample US productive and port capacity, increased
foreign imports of US coal could enhance international energy security.
Long-term contracts and equity investments by foreign purchasers in US
coal reserves, however, would be required to reduce the cost of US coal and
enhance the potential for US coal exports.
Confidential
GI 84-10156
September 1984
 Figure 1
World Energy Reserves, 1983
Coal
3,400 billion boe
OECD
United States
United Kingdom
Australia
West Germany
Other
Communist Countries
USSR
China
Poland
Other
S Other
South Africa
Other
45.8
27.8
6.5
5.3
5.0
1.2
46.6
24.1
14.4
4.5
3.6
7.6
3.7
3.9
oil
0
OECD
670 billion barrel.
United States
Other
0
Communist Countries
USSR
Other
0
Middle East
Saudi Arabia
Kuwait
Iran
Other
?
Other
Mexico
Libya
Venezuela
Other
Gas
0
OECD
15.9
540 billion boe
United States
6.7
Canada
3.2
Other
6.0
0
Communist Countries
42.5
USSR
41.0
Other
1.5
0
Middle East
25.5
oh
Iran
16.0
Saudi Arabia
3.9
Other
5.6
0
Other
16.1
Algeria
3.7
Mexico
2.5
Other
9.9
Table 1
OECD: Consumption of Solid Fuels a
1973
1982
IEA a
IEA d
CIA
Total
1,048.9
1,258.9
1,721.9
1,557.3
1,420.0
North America
533.0
686.0
902.3
904.5
810.5
United States
510.0
641.0
847.5
849.0
755.0
Canada
23.0
45.0
54.8
55.5
55.5
Western Europe
386.3
423.6
582.7
474.3
434.5
West Germany
125.9
129.2
142.5
127.5
127.5
United Kingdom
118.6
101.0
110.3
97.5
97.5
France
40.0
45.0
50.0
25.0
25.0
Turkey
17.8
25.4
62.6
42.0
33.0
Italy
15.5
22.8
51.0
34.5
31.5
Spain
15.1
27.9
36.4
33.0
33.0
Belgium
17.6
17.0
22.5
18.0
16.0
Denmark
3.1
9.3
12.3
12.0
10.0
Austria
6.4
7.5
7.6
7.5
7.5
Netherlands
4.8
6.6
18.9
12.0
12.0
Greece
3.4
6.0
15.6
13.5
9.0
Ireland
2.4
3.2
7.6
6.0
6.0
Other
15.7
22.7
45.4
45.8
26.5
Japan
89.7
95.4
153.0
108.0
108.0
Australia
37.5
51.5
80.1
66.0
63.0
New Zealand
2.4
2.4
3.8
4.5
4.0
a Predominantly coal.
b Million metric tons have been converted from million tons oil
equivalent (mtoe) on the basis of I mtoe equals approximately 1.5
million tons of coal.
e 1982 IEA estimate plus France and Finland.
d 1984 IEA estimate plus France and Finland.
 Approved For Release 2009/02/05 : CIA-RDP85S00315R000200100002-8
Coal Market: Trade
Prospects and Energy
Security Implications
Coal has played a major role in reducing OECD oil
use and enhancing energy security. Since 1973,
OECD coal consumption has increased by roughly
210 million tons-the equivalent of 2.8 million barrels
per day oil equivalent (b/doe)'-and coal's share of
total energy consumption has risen from 21 percent to
25 percent. This expansion in coal use is partially
responsible for declining oil prices and the weak oil
Given the size and geographic distribution of world
energy reserves, coal offers great potential for meeting
future OECD energy needs from indigenous sources:
? Recoverable world coal reserves are five times larg-
er than those of oil and six times larger than those of
gas.
? Nearly 50 percent of recoverable coal reserves are
located in OECD nations, with the United States
alone accounting for 28 percent of total world
reserves. In contrast, more than two-thirds of proved
world oil and gas reserves are located in Communist
Sharply expanded coal use also has the potential to
benefit the United States-historically the world's
largest coal supplier. The surge in coal demand
following the 1979 oil shock, combined with supply
disruptions in Poland and Australia during 1980 and
1981, caused US coal exports to jump from 59 million
tons in 1979 to 100 million tons in 1981. In 1982, US
coal exports of 96 million tons contributed $6 billion
to the US balance of trade and provided more than
Changing Demand Outlook
Although OECD coal consumption will grow during
the 1980s, current demand projections indicate a
sharply diminished role for coal in meeting future
energy needs. OECD governments have trimmed esti-
mates of 1990 coal consumption by 165 million tons
since 1982. Current OECD government estimates
place 1990 total coal requirements at 1.5 billion
tons-about 300 million tons above present consump-
tion. We believe the increase will be only about 150
million tons:
? Our estimate of OECD electricity consumption in
1990 is 9 percent below the current OECD forecast,
and electricity generation accounts for nearly two-
thirds of OECD coal use. 25X1
? In the industrial sector, record-high-interest rates
and lower oil prices have boosted capital costs and
extended the payback period of fuel switching, thus
dampening coal conversion efforts.
? Growth in coal use for synthetic fuels will be small
because escalating capital costs, declining oil prices,
and reduced government funding have led to many
cancellations and delays in synfuel projects around 25X1
25X1
Western Europe. Substantial growth in West Europe-
an coal demand is failing to materialize. West Euro-
pean governments have already cut back projected
1990 coal demand by nearly 20 percent since 1982.
We believe even these revised projections are overly
optimistic. On the basis of the latest private-sector
forecasts and our own analysis of key coal use sectors,
we believe coal consumption will increase by only
about 11 million tons between now and the end of the
decade-less than one-third the increase predicted
this year by West European governments. Coal con-
sumption in nearly all countries will fall well short of
expectations: 25X1
? Coal demand in France is likely to drop to 25-30
million tons by 1990 from 45 million tons currently.
 An aggressive nuclear power program is expected to
cut electric utility coal use to less than half current
levels. Reluctance by industrialists to convert to coal
have dashed Paris's hopes for maintaining coal
consumption at 45-50 million tons during the 1980s.
? Italian projections of 1990 coal use have fallen from
50 million tons to 34 million tons, and coal's share of
total energy use has been cut from 18 percent to 14
percent. With only one-third of proposed coal-fired
electric generating capacity now under construction,
private-sector projections place 1990 coal consump-
tion even lower. Further penetration of surplus gas
supplies into electricity generation could hamper
coal use even more.
? Danish electric power stations-which rely on coal
for more than 90 percent of fuel use-are coming
under increasing pressure to switch some facilities
from coal to gas to dispose of huge surplus gas
supplies from the government's North Sea gas
project. A switch to gas could reduce projected 1990
coal use by 1-2 million tons.
? Coal use in West Germany and the United King-
dom-Western Europe's largest consumers-is now
expected to decline slightly during the 1980s as a
result of lower-than-expected growth in electricity
demand and a strong commitment to the use of
nuclear power for electricity generation. Govern-
ment projections made in 1982 expected an increase
of more than 20 million tons
Non-OECD. Outside the OECD, the Far East will
account for most of the growth in non-Communist
coal consumption. coal con-
sumption in the Far East to grow from a out 139
million tons in 1983 to nearly 200 million tons by
1990. Three nations which are heavily dependent
upon imported oil, South Korea, Taiwan, and Hong
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Figure 2
Major Coal Movements, 1983
ie
f
Africa
Africa
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 Table 2
World Coal Trade
Million tons
North America
19.5
17.5
16.6
15.0
South America
6.3
5.2
6.3
11.0
Eastern Europe
32.5
32.5
33.8
34.0
Other
3.0
4.8
6.8
13.0
Exporters
United States
59.9
102.0
70.4
63.0
Australia
40.4
51.0
59.6
80.0
Poland
41.3
15.0
35.2
40.0
South Africa
23.4
29.9
29.5
45.0
USSR
23.9
22.0
21.5
27.0
Canada
13.9
16.1
17.1
27.0
Kong, have several coal-fired power plants under
construction or planned that will rely primarily upon
imported steam coal supplies. Coal consumption in
other less developed countries (LDCs) is likely to grow
by about 25 million tons between now and the end of
the decade, primarily as a result of the increased use
demand will-bee-met by developing domestic reserves,
Egypt, Morocco, Mexico, and Brazil could be import-
ing significant volumes of steam coal by 1990
Constraints on Coal. Several factors currently con-
strain increased coal demand. The acid rain contro-
versy has heightened environmental concerns over
expanded coal use. Although steam coal can be
delivered to Western Europe and Japan at about half
Table 3
World Steam Coal Trade
Million low
2.3
12.5
15.2
27
Eastern Europe
20.5
20.4
22.8
22
North America
12.6
12.2
10.3
10
Other
2.6
2.8
4.4
12
Exporters
United States
13.9
42.8
25.1
23
South Africa
21.4
27.2
26.0
43
Poland
32.9
12.5
27.1
31
Australia
5.7
10.2
18.3
31
USSR
13.1
12.0
11.5
11
Colombia
0
0
NEGL
16
the cost of oil or natural gas, capital costs for coal-
fired equipment are generally two to four times as
much as those for oil and gas, and the capital stock in
the industrial sector is dominated by oil- and gas-fired
boilers which will not need replacing until the 1990s.
Moreover, declining oil prices have extended the
payback periods of coal conversions. Indeed, expanded
coal use since the 1979-80 oil price hikes is in part
responsible for the recent decline in oil prices, and
prospects for little or no oil price increases over the
next several years have reduced the economic incen-
tive for additional coal conversions. Because coal is a
primary substitute for oil, significantly increased coal
consumption outside the electricity generation sector
is only likely to follow a sharp increase in oil prices.
25X1
25X1
25X1
 Table 4
World Metallurgical Coal Trade
Asia
61.2
75.9
71.0
78.0
Japan
55.6
65.8
59.5
63.0
Western Europe
40.5
41.3
35.4
41.0
Eastern Europe
12.0
12.1
11.0
12.0
South America
5.7
5.2
6.1
9.0
North America
6.9
5.3
6.3
5.0
Others
1.0
2.0
2.6
3.0
Exporters
United States
46.0
59.3
45.3
40.0
Australia
34.7
40.8
41.3
49.0
Canada
12.5
13.9
14.8
20.0
USSR
10.8
10.0
10.0
16.0
Poland
8.4
2.5
8.1
9.0
Other
14.9
15.3
12.9
14.0
Trade Prospects -
Because Western Europe and Japan account for the
bulk of coal purchases, lowered coal demand projec-
tions in these regions have cut sharply into trade
prospects. Coal imports by Japan are now expected to
reach only 90 million tons in 1990, compared with 135
million tons estimated two years ago. In Western
Europe, steam coal imports, once estimated at be-
tween 150-160 million tons by the end of the decade,
will now probably reach only about half that level,
according to our analysis. Altogether we expect inter-
national trade in coal to grow only from 260 million
tons in 1983 to approximately 325 million tons in
1990-far below the forecasts of 450-500 million tons
predicted by many analysts two to three years ago.
Coal export capacity during the 1980s will far exceed
demand. Spurred by the boom in coal trade following
the 1979-80 oil price hikes and optimistic demand
1981-82
1983-84
Figure 3 `
Changing Projections for Worldwide
Steam Coal and Japanese Coal Imports, 1990
W
June 1977
August 1979
April 1982
November 1983
Metallurgical coal
Steam coal
Projections by Japan's Ministry of International Trade
and Industry (MITI).
 Figure 4
Australia, Poland, and South Africa: Coal Exports, 1973-84
Legend
Steam coal
Coking coal
projections, major coal-exporting nations initiated
projects to sharply expand export capacity. We expect
coal-export potential outside the United States to
increase by more than 120 million tons between now
and the end of the decade:
? Australia will have the capacity to increase exports
by some 60 million tons by 1990.
? South Africa will add some 10 million tons to its
export potential through upgrading rail and port
facilities.
? Colombia entered the export market last year and
will have the capacity to ship around 16 million tons
by 1990.
? The USSR will increase its export potential by up to
6 million tons through a Japanese-Soviet coal
venture.
? Canada and China will also increase their coal
export capabilities, largely through Japanese-
backed development projects.
With the bulk of this productive capacity dominated
by capital-intensive surface mines, we expect foreign
suppliers to be aggressive in marketing their output.
Maximum output volume is critical because of the
Implications for Energy Markets
Slower-than-expected growth in coal consumption and
trade during the 1980s has important implications for
a number of energy issues.
US Exports. Intense competition from foreign suppli-
ers, combined with equity investments in foreign coal
development projects, will limit the potential for coal
exports from the United States-the world's high-cost
or marginal supplier. Barring a foreign coal supply
disruption or a sharp reduction in the cost of US coal,
we believe US coal exports will approximate only 65
 Figure 5. New coal development projects in Canada, Australia,
and the USSR are slated to deliver roughly 20 million tons of
coking coal to Japan in I985.F_~
Figure 6
United States: Coal Exports, 1973-84
lower-than-expect-
ed coo use count result in greater oil
consumption, increasing our dependence on the vola-
tile Persian Gulf region and raising the potential for a
rise in oil prices. Furthermore, based on coal's price
advantage, we believe existing OECD capacity to
consume coal will probably be almost fully utilized.
Conversions to coal or construction of new coal-fired
facilities could require as much as several years'
leadtime. As a result, excess coal productive capacity
will be of little use in mitigating the effects of an oil
shortfall in foreign supplies
Oil Securit .
million tons in 1990-below present levels and rough-
ly one-third below recent projections by the National
Coal Association and the Department of Energy.
Slower growth in international coal trade largely
accounts for our lower assessment. Under these condi-
tions, as long as the United States is regarded as the
swing supplier, there is only limited potential for
increased coal exports. With substantial surplus pro-
ductive and port capacity, however, the United States
could benefit from a sudden surge in coal demand or
West European Gas Security. Failure to switch to
coal, especially in the industrial sector, could require
increased dependence on indigenous West European
natural gas resources. Because of potential delays in 25X1
developing North Sea gas deposits, diminished pros-
pects for coal could further improve the likelihood for
Although security concerns may not reemerge as a 25X1
preeminent issue until the 1990s when the oil market
tightens, failure to encourage coal use now could
significantly restrict coal's future role in reducing
OECD dependence on imported oil. Indeed, the cur-
rent weakness of the international coal market, com-
bined with lower expectations of future growth in
trade during the 1980s, may not provide the necessary
 confidence to sustain capital-intensive long-term in-
vestment in coal production and infrastructure facili-
ties. Beyond 1990, most forecasts expect substantially
more growth in coal consumption than during the
1980s as a result of a sharp slowdown in the growth of
nuclear power and higher oil prices:
? West European coal demand is expected to increase 2
by 60 million tons during the 1990s-roughly three
times the growth in consumption during the remain-
c 25X1
? Tokyo expects coal consumption to increase by 56 25
million tons in the next decade, compared with an
To meet ex anded coal consum tion in the next
decade t least four new
mines with 3-5 million tons o capacity per year will
be required annually in the 1990s in the exporting
countries. The environment in the coal industry over
the next several years, however, will not be conducive
to such investment because most producers will re-
main wary of overdevelopment. Some producers are
currently selling coal at or below cost in a glutted
market as a result of the earlier sharp expansion in
productive capacity and present sluggish demand.
 Figure 7. Capital-intensive surface mines are prone to price cutting
in a weak market to retain volume
. Although producers may continue to sell coal at or
..below marginal cost in an effort to cover high fixed
costs, such practices will not generate the profits
needed for large-scale investment in coal production
and infrastructure to go ahead in a timely way{
To achieve enhanced coal use, OECD governments
could take several steps, including:
? Providing incentives such as tax concessions or
subsidies to industry to offset the high cost of
converting facilities from oil and gas to coal.
? Promoting methods for the displacement of oil and
gas by electricity and thus indirectly adding to coal
use.
? Promoting research and development efforts and
developing new technologies to burn coal more
effectively and cleanly to meet growing environmen- 25X1
With the United States accounting for more than one-
fourth of world coal reserves and ample US produc-
tive and port capacity, increased foreign imports of
US coal could enhance international energy security.
Measures to increase the potential for US coal ex-
ports, however, would require reducing the cost of US
coal. According to a report prepared by the Depart-
ment of Energy, the potential for price reductions on
inland coal moving to export markets is substantial.
Long-term contracts and equity investments would be
Coal's Potential
We believe coal has substantial potential to improve
international energy security because of its ability to
replace oil and natural gas-two fuels whose sources
of supply have proved unreliable in some cases in
recent years. Coal can be substituted for oil and gas in
many areas of the industrial sector-the largest ener-
gy-consuming sector in the OECD-provided the
economics of coal use can be made more attractive.
Based on OECD estimates of potential consumption
of 700 million tons of steam coal in the industrial
sector by the year 2000, expanded industrial coal use
could cut projected oil and gas requirements in indus-
try by roughly 50 percent by the end of the century-
saving nearly 7 million b/doe of oil and gas in OECD
countries. In Western Europe, for example, more than
half of the increase in gas use through the year 2000
is expected in the industrial sector, and we believe
increased coal use could potentially supplant about
one-fourth of projected industrial gas demand by the
foreign purchasers:
? Long-term contracts encourage domestic companies
to invest in cost-cutting facilities and equipment.
Equity investments by purchasers support introduc-
tion of new technologies and infrastructure improve-
ments while providing the buyer a direct return on
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