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Stranded Down Under? China’s changing demand for coal and how it affects Australian coal assets.

Author: Ben Caldecott
Institution: University of Oxford
Type of case study: Research

About the research

Australia is one of the largest exporters of coal to China and has continued to encourage investment in new domestic coal mines. This investment has been in response to the stability of China’s demand for coal in recent years and the perceived continued growth in demand. Research carried out by the Stranded Assets Programme at the University of Oxford’s Smith School of Enterprise and the Environment suggests that China’s appetite for coal is likely to decline, leaving the Australian coal market in the potentially perilous position of being devalued.

The research used data from two datasets held by the UK Data Service; the International Energy Agency World Energy Statistics, 2012 edition, and the International Energy Agency Coal Information, 2012 edition. These data were used to analyse and map China’s coal consumption that was provided by imported coal. These data were also used to discover the energy content of coal exports from some OECD countries and to examine the markets for Australia’s coal exports.

Environment-related factors that are changing Chinese demand for coal and coal imports were identified and systematised through round-table discussion, interviews, a news analysis and a literature review. Each driver was then analysed with the use of a further literature review, interviews, key industry reports and data provided by agencies such as the Australian Bureau of Statistics, the World Bank and the International Energy Agency. A similar approach was used to identify key coal investments in Australia potentially at risk. Chinese coal consumption and import data were used to determine the relationship between demand and imports. The factors responsible for the recent downturn in coal prices were analysed, such as increased exports from the US and decreased imports from China. This indicated the order of magnitude of coal import or export fluctuations that can have a significant impact on coal prices.

In order to determine which companies would be at risk if the price of coal decreased, an ownership map was created containing the ten largest proposed Australian coal mining projects, using Australian government data to identify the biggest mines and data from Standard & Poor’s, the financial services company, to trace the mines to their ultimate owners and relevant stock exchanges.


The research, by Ben Caldecott, James Tilbury and Yuge Ma, of the Smith School of Enterprise and the Environment identified changing environmental factors as a key reason for the decline in China’s appetite for coal. As the world’s second-largest economy and the global price setter for coal, China is investing in developing cleaner technology, improving energy efficiency and establishing environmental regulations to reduce the environmental impact of heavy industry. The evolving political landscape in the country has also allowed grass-roots political activism to develop, encouraging China’s leaders to consider the local impact of unregulated industrial development and pollution.

Aside from environmental factors, the research also identified clear economic drivers for the decline. The Chinese iron and steel industries, for which coal is the greatest source of energy, are being restructured to improve their efficiency. As a result, the least efficient production centres are being closed to focus production in more energy- and cost- efficient factories. Increased market openness has also opened China’s iron and steel market to greater competition, a further push to improve efficiency, whilst firms are being actively encouraged to cut their use of fossil fuels with the introduction of carbon pricing and emissions trading schemes. Investment in green technology and renewable energy is also increasing – this research predicts that as much as 28% of China’s electricity will be generated by renewables by 2035.

“…it is clear that China’s coal demand patterns are changing as a result of environment-related factors and consequently less coal will be consumed than is currently expected by many owners and operators of coal assets. Given China’s growing role as the price setter in global and regional coal markets falling demand will, all things being equal, reduce coal prices. This would result in coal assets under development becoming stranded or operating mines only covering their marginal costs and subsequently failing to provide a sufficient return on investment.” Stranded Down Under, p.16

The research suggests that Chinese coal consumption could fall by 5% by 2020. China also produces its own coal and the research concluded that domestic coal producers would likely be prioritised over importing companies in the event of a fall in demand. This prioritisation could have a marked effect on the Australian economy, which continues to invest in large-scale coal mining and its related infrastructure.

The research findings indicate the potential benefit to the Australian coal industry and government policymakers in focusing on the future of potential Chinese demand for coal when making decisions about coal infrastructure investment. The change in China’s demand, resulting in Australia being unable to command the same level of pricing in the future, combined with the higher costs associated with coal mining in the country, could mean that existing coal mines might experience a decline in profitability along with those yet to reach full production.


The Stranded Assets Programme

This research was carried out by the Stranded Assets Programme, a network which researches the risk factors for stranded assets; assets which have suffered from unanticipated or premature write-downs or devaluations to liabilities. The programme has a particular interest in risk factors relating to the environment, which are increasingly featuring in the alteration of asset values across a range of sectors. The Stranded Assets Programme is based at the University of Oxford’s Smith School of Enterprise and the Environment and works with partners across business, investors and policy makers to manage the consequences of environment-related risks and stranded assets.


The research received considerable media and policy focus in both Australia and China, particularly by the financial and environmental sectors which debated its findings in relation to continued investment in coal mining: 

“Nathan Fabian, chief executive of the Investor Group on Climate Change, told Guardian Australia that Australian state and federal governments had taken a short-term view on coal mining. “It appears the government is trying to take short-term advantage of projects that may have the consequences of stranded assets later,” he said. “Private investors can work out that’s not wise and avoid these projects, but citizens through the government can’t make those decisions so there is a risk to state coffers if stranded assets have to be abandoned.” Fabian said he expected coal assets to be stranded “by the end of the decade”, claiming that investors were already questioning the wisdom of backing fossil fuels.”  Coal’s grim forecast: projects may be ‘stranded’ by falling Chinese demand, Guardian Australia, 16 December 2013

“Coal mining companies in Australia have been enjoying the good life in recent years, making millions of dollars from feeding the seemingly insatiable energy appetites of Asia’s tiger economies – particularly that of China. But a new report by the Smith School of Enterprise and the Environment (SSEE) at Oxford in the UK warns that Australia’s coal mining party could be coming to an end. It says coal demand in China looks likely to fall in the years ahead due to concerns about climate change and other factors, leaving billions of dollars of investments in Australian coal mining projects in jeopardy. It also gives powerful confirmation to the ‘carbon bubble‘ theory advanced by Carbon Tracker and – that most of the fossil fuel ‘assets’ supporting energy company valuations will prove to be unburnable and have no value.” Australia facing slump as China ‘goes green’ The, 24 December 2013.

A Critique of the Coal Divestment Campaign for the Minerals Council of Australia by Sinclair Davidson, Professor of Institutional Economics in the School of Economics, Finance and Marketing at RMIT University discussed the findings of the research: “A concerted effort by government to deregulate the industry and provide greater business certainty would go a long way to alleviate the risk of stranded assets that concerns Caldecott et al.” (p.21)

To read the report in full:

Caldecott, B., Tilbury, J., Yuge, M. (2013) ‘Stranded down under? Environment-related factors changing China’s demand for coal and what this means for Australian coal assets’, Smith School of Enterprise and the Environment. Retrieved 6 January 2015 from