As the world's fifth largest coal exporter and a key swing supplier between the Atlantic and Pacific coal markets, South Africa is a crucial player in global markets.  While the country has long been Europe's major supplier of coal, South African exports have begun to shift east and are steadily becoming a major source of coal supply for the Asian coal boom.  This strategic positioning sets the stage for South Africa to become an even more important player in determining how the world trades and prices coal. 

In the coming decade South Africa will face a number of difficult decisions around how to meet increasing domestic coal demand while dealing with climate concerns, increasing exports, and building the infrastructure that would enable the country to significantly expand market share in the global coal trade.  In many ways, the fate of South Africa's coal sector now hangs in the balance.

This paper explores the interplay between South Africa's domestic and export thermal coal markets and what might shape their development in the future. The paper first examines the industrial organisation and political-economy of the coal sector in South Africa.  An overview is provided of coal mining companies, how the current market structure emerged historically, the development of rail and port facilities, and coal costs and prices. Policy and legislative developments are also described. Finally scenarios are developed for local and export coal markets.

China's coal market is now in the midst of a radical restructuring that has the potential to change how coal is produced, traded and consumed both in China and the rest of the world.  The restructuring aims to integrate the coal and power sectors at giant "coal-power bases" that combined would churn out more coal annually than all the coal produced in the entire United States. 

Coal-power integration is now a focal point of the Chinese government's energy policy, driven by the dramatic "coal-power conflict".  Coal prices are market-based, but power prices are tightly controlled by the government.  This has caused massive losses for Chinese power generators in 2008 and 2010 and triggered government intervention in the coal market with attempts to cap the price of coal.  The pervasive conflict between coal and power is now driving the Chinese government to remake these markets.

Coal-power base policy aims to establish upwards of 14 major coal-power bases, each producing over 100 mt of coal with consuming industries on-site.  The plan envisions that roughly half of China's coal production would be produced at a handful major coal-power base sites that are controlled by key state-owned enterprises (SOEs) and the central government.    

PESD's new research analyzes China's coal-power base reforms and how they will impact Chinese and global coal markets.  Several key findings are:

First, the implementation of coal-power bases would enhance central government's control over the coal sector and over coal prices.  The government could control coal pricing in a large share of the market and mitigate power sector losses by mandating lower coal transaction prices within integrated SOEs.  Using this kind of internal transfer pricing at below market prices for up to half of China's coal would represent a meaningful shift in how coal is priced in China.  If a large share of China's coal were transacted in this manner, it might create an unofficial two-tiered pricing structure in the coal market.

Second, coal-power base policy would bring about modernization and mechanization of a larger share of China's coal production, in theory bringing larger economies of scale to the sector.  While up-front capital investment per ton produced will certainly increase, the marginal cost of coal production should decrease, all other things equal. 

Third, the massive rebalancing of China's coal market implied by coal-power bases is poised to have important impacts on the globally traded coal market.  Since 2009, China's import behavior has become a dominant factor determining the price of globally traded coal.  In simple terms, when Chinese domestic prices are higher than global prices, the country imports.  The development of coal-power bases could radically alter coal price formation in China and directly impact China's appetite for imports, and therefore has the potential to alter coal price formation globally.

Carbon capture and storage (CCS) is now widely viewed as imperative for global climate stabilisation. Coal is the world’s fastest growing fossil fuel, and coal combustion is now the largest single source of anthropogenic CO2 emissions.

China’s coal sector is the world’s largest and the rapid industrialisation of China is inexorably tied to the same process that fuelled the West’s development - burning coal. International Energy Agency (IEA) projections suggest that China will have 1,332 gigawatts (GW) of coal power generation capacity by 2030, compared to 583 GW in the US and EU combined.