Peak coal may be coming

Prices of Newcastle coal, the Asian coal price benchmark, are poised to rise by as much as 30 per cent this year, approaching the peak levels seen in 2008.

It is no surprise the countries driving global coal demand through the roof are the same countries pushing global crude demand. Find the fastest growing economies, and you will find where demand for oil and coal are the strongest.

ChinaÂ’s coal consumption is expected to rise by another 10 per cent this year, propelled by strong economic growth, the soaring prices of diesel fuel and the fact water levels at most of the countryÂ’s hydroelectric sites are well below normal due to the severe drought this winter.

Demand in India, where power blackouts are still the norm and where 40 per cent of the countryÂ’s 1.2 billion people still havenÂ’t been hooked up to a grid, is expected to grow by more than 20 per cent this year.

It is good news for coal prices but the only problem is whether production can keep pace. Sound familiar?

ChinaÂ’s coal industry already accounts for more than 40 per cent of world production with less than 15 per cent of the planetÂ’s coal reserves. This is a rate of resource extraction that U.S. coal companies can only dream about.

Even so, domestic mine production in China lags runaway demand growth, forcing the worldÂ’s largest coal burner to turn to more foreign suppliers such as Australia. Last year, the Chinese economy burnt a staggering 3.2 billion metric tonnes of the stuff.

This is already a huge challenge to ChinaÂ’s railway system that is clogged with hauling billions of tonnes of coal from increasingly distant mines in the remote western regions of the country to the industrial heartland in the east.

But the Chinese economy faces an even more daunting challenge to its coal consumption than transportation logistics. Domestic coal production is rapidly approaching what even the Chinese government acknowledges to be a national production peak.

At the current extraction rate, China could hit that production peak as early as 2015. Once there, most estimates show a sharp drop off in the countryÂ’s coal production beginning around 2020. This is why Beijing is considering capping domestic coal production, fearing the country is depleting its remaining coal reserves far too quickly to sustain future economic growth.

This policy shift has sent Chinese coal companies scouring the world looking for new coal reserves. They have already spent $21 billion on overseas coal acquisitions.

As the largest coal producing country starts thinking about conserving its remaining coal reserves, you wonder just how far off we are from a world of peak coal?