The 388th Forum on Research Works

June 30, 2004

Coal Supply and Demand Trends andChallenges Facing a Stable Coal Supply in Japan- Coal Use Considering Global Warming Prevention and
the Prospects of Coal Use Yoshimitsu MIMUROTO*, Koichi KOIZUMI**

Purpose of the Report
Demand for coal, particularly steaming coal for power generation, has increased
considerably since the second oil crisis due to its low cost and stable supply compared to other fossil
fuels. After overcoming the Asian currency crisis of 1997, Asian countries increased their power
demand in order to achieve further economic growth. Behind such factors as the deregulation ofelectric utilities, demand for steaming coal is expected to increase even further as a low-cost fuel for
power generation.
The most significant problem posed by coal is the large amount of carbon dioxide (CO2)emitted upon coal firing. Fossil fuels all generate carbon dioxide to some extent when they areburned, but the CO2 intensity of steaming coal is 1.8 times that of natural gas. Therefore, restrained
use of coal is promoted in some quarters considering global warming prevention. However, theenergy market is seeking an energy mix that not only considers global warming but that also has asecure, stable supply and is economically efficient.
This report examines the current situation of steaming coal supply and demand, mainly in
Asia, and particularly the price hike of steaming coal observed since the end of 2003 and its future
prospects. In addition, it studies ideal future coal use that considers global warming prevention.
Major Findings(1) As history indicates, the basic merit in the use of coal is its price competitiveness.
(2) The present high prices can be attributed to the increase in demand, including the special
procurements by China, and a decline in the additional export capacities of countries due tothe foreign exchange situation. The market-clearing price for Australian steaming coal is* Senior Research Fellow, Coal Group, Industrial Research Unit, The Institute of Energy Economics, Japan** Senior Engineer, Coal Group, Industrial Research Unit, The Institute of Energy Economics, Japan1

A$40-50/ton (US$ 28-35/ton at the rate of 0.7 US$/A$). About three years will be required
to expand the supply capacity to meet the demand expansion.
(3) Coal demand is likely to stay active mainly in Asia, and the supply capacity for Australiancoal can be expected to increase. However, there are challenges to be addressed inreinforcing the supply capacity of China and Indonesia.
(4) While the future energy market will choose fuels based on price competitiveness, stablesupply, and environmental consideration, coal use will be selected based on the following
three aspects as a set: price competitiveness, competitive clean coal technology (CCT), andthe Kyoto Mechanisms.
(5) A shift to coal could become a fuel option according to the achievements in these three
aspects.

1. Trends in Coal Supply and Demand and Coal Prices
The upward trend in the spot prices for steaming coal since the end of 2003 shows nosigns of slowing down, and the coal supply on the market continues to be rather scarce. The
underlying factors and the future prospect of an increase in the current coal price will be examined
below after comparing the changes in coal prices to those in prices of other fossil fuels.

1-1 Price stability and price competitivenessThe average price of imported coking coal has shifted between ¥4,000-10,000/ton, whilethat of imported steaming coal has shifted between ¥3,500-8,000/ton since 1990, as shown in
Figure 1-1. These price movements may seem considerably large, but when the price per unit
calorific value (1,000 kcal) is compared with that of other imported fossil fuels as indicated in
Figures 1-2 and 1-3, the price movements are found to be extremely small. In addition, coal prices
are lower than the prices of other imported fossil fuels.
The changes in the CIF prices of coking coal, steaming coal, crude oil, and liquid naturalgas (LNG) per 1,000 kcal in Japan are shown in yen in Figure 1-2 and in U.S. dollars (US¢) in
Figure 1-3. These graphs clearly indicate the price differences between coal and other fossil fuels,
and they reveal that coal is the lowest in cost and is only experiencing slight price fluctuations.
The coal prices moved as if they were linked with oil prices until the second oil crisis, but
this correlation has not been obvious since then. When indicated in yen, the price levels of crude oiland LNG since 2000 are not found to be as high as the price levels observed during and after thesecond oil crisis. However, this is due to the influence of the exchange rate (appreciation of the yen).

2

As shown in Figure 1-3, when indicated in U.S. dollars, the prices of crude oil and LNG are rising
to levels as high as those at the time of the second oil crisis. Therefore, the movements in energy
prices can be evaluated more accurately based on U.S. dollars rather than based on yen.
Figure 1-1 Changes in the Average Price of Imported Coal in Japan(CIF price; yen)

15,00010,000

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

5,000

0

Sources:

Coking coal
Steaming coal

1974

Coal prices (¥/ton)

20,000“2004 EDMC Handbook of Energy & Economics in Japan” and “EDMC Data Bank,” The Energy Data andModeling Center (EDMC) of The Institute of Energy Economics, Japan (IEEJ).

Figure 1-2 Changes in the Average Price of Imported Energy in Japan(CIF price per 1,000 kcal; yen)
Crude oil

LNG

Coking coal

Steaming coal¥/US$ (right axis)

7.0

420
Second oil crisis

Sources:

360

5.0

300
Gulf War

4.0

240First oil crisis

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

0

1977

0.0

1975

60

1973

1.0

1971

120

1969

2.0

1967

180

1965

3.0

Exchange rate (¥/US$) 'Fuel prices (¥/1,000 kcal) '6.0“2004 EDMC Handbook of Energy & Economics in Japan” and “EDMC Data Bank,” IEEJ/EDMC.

3

Figure 1-3 Changes in the Average Price of Imported Energy in Japan(CIF price per 1,000 kcal; US¢)
Crude oil

LNG

Coking coal

Steaming coal

Second oil crisis
2.0
1.5First oil crisis
1.0

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

1967

0.5
0.0

Sources:

Gulf War

2.5

1965

Fuel prices (US¢/1,000 kcal)

3.0“2004 EDMC Handbook of Energy & Economics in Japan” and “EDMC Data Bank,” IEEJ/EDMC.

1-2 Steep rise in the steaming coal prices
Figure 1-4 indicates the changes in the spot FOB prices of steaming coal exported fromthe Port of Newcastle, Australia (Barrow Jonker Index (BJI) spot prices) and the FOB prices basedon long-term contracts for Japan-bound Australian steaming coal in and after 1986.
Figure 1-4 Changes in the Spot FOB Prices of Steaming Coal Shipped fromthe Port of Newcastle (BJI Spot Prices)(US$/ton)
60
55
50
45

Japan Long-term Contracts

40
35
30

Note:

Sources:Jan-2004

Jan-2003

Jan-2002

Jan-2001

Jan-2000

Jan-1999

Jan-1998

Jan-1997

Jan-1995

Jan-1994

Jan-1993

Jan-1992

Jan-1991

Jan-1990

Jan-1989

Jan-1988

Jan-1987

Jan-1986

20

Jan-1996

BJI

25“BJI” indicates the spot FOB prices of steaming coal exported from the Port of Newcastle, Australia. “Japan
Long-term Contracts” indicates the FOB prices based on long-term contracts for Japan-bound Australiansteaming coal.
“Coal 2003,” Barlow Jonker; and other materials.

4

The Japanese power companies rely on long-term contracts (including fiscal-year
contracts) for 70% of the steaming coal they procure, and procurement by spot contracts hasremained below 30%. Steaming coal users other than power companies procure coal by yearly
contracts or spot contracts rather than long-term contracts.
The spot prices of steaming coal are decided by market principles based on the supply
and demand situation, and they change earlier than the prices based on long-term contracts.
Normally, the spot prices fall below the long-term contract-based prices and become stable after a
price boom (when the supply comes to sufficiently meet the demand).
The spot prices of steaming coal exceeded the long-term contract-based prices for FY
2003 in September 2003, and have indicated an unprecedented surge since then. In the past,steaming coal prices have repeated a rise and fall in six-year cycles, but this time, they are booming
in a shorter cycle of three years and a half.
The factors behind the steaming coal price hike will be examined below, separately for
those on the demand side and the supply side.
(1) Factors on the demand side
“Expansion of steaming coal demand in Asian countries”
The firm increase in coal demand, centering on steaming coal for power generation, in
Asian countries and region including Japan, South Korea, and Taiwan is at the base of the steaming
coal price hike. Figure 1-5 indicates the year-on-year changes in consumption of coal for power
generation in Japan, South Korea, and Taiwan in a bar graph and compares them with the steaming
coal spot prices.
In 1989, steaming coal consumption was restrained in Japan and South Korea due to theprice increase as well as the slump in crude oil prices. The share of coal-fired power in the twocountries had been smaller than that at the present and had responded sensitively to fuel prices.
From the 1990s, many countries and regions came to place more emphasis on coal-fired power assource of base-load power supply. Figure 1-5 indicates that the steaming coal price has risen in theyear following a year in which consumption of coal for power generation expanded in the three
countries and region from the 1990s. This tendency showed up in the consumption expansion in
1994, the price increase in 1995, the consumption expansion in 2000, and the price increase in 2001.
The recent steaming coal price hike also occurred following the significant consumption expansion
in 2003.

5

Figure 1-5 Changes in the Consumption of Coal for Power Generationand the BJI Spot Prices

Note:Sources:South Korea

Taiwan

BJI Spot Prices (US$/ton)

15

0

10

-2

Jan-20042

Jan-2003

20

Jan-2002

4

Jan-2001

25

Jan-2000

6Jan-199930

Jan-1998

8

Jan-1997

35

Jan-1996

10

Jan-1995

40

Jan-1994

12

Jan-1993

45

Jan-1992

14

Jan-1991

50

Jan-1990

16

Jan-1989

55

Jan-1988

18

Jan-1987

60

Year-on-year changes (million tons) 'BJI Spot Prices (US$/ton)Japan

The bar graph indicates the amount of increase/decrease in consumption of coal for power generation in Japan,
South Korea, and Taiwan over the previous year.
“Coal 2003,” Barlow Jonker; “EDMC Data Bank,” IEEJ/EDMC; “Korea Energy Review Monthly, Mach
2004,” Korea Energy Economics Institute (KEEI); “Energy Statistical Data Book 2002,” Energy Commission,
Ministry of Economic Affairs, Taiwan; and other materials.

(2) Factors on the supply side
“Decline in China’s export capacity”
China’s coal exports steadily increased in 2000 and 2001 due to its policy of encouraging
coal exports, and Chinese coal came to increase importance in Asia, particularly in East Asian
countries, as a nearby source. However, since 2002, export growth has been stagnant compared tothe expansion in the production volume due to the rapid increase in the domestic coal demand
within China. As shown in Figure 1-6, the proportion of export volume in coal production volume
declined in 2002 and 2003.

6

Figure 1-6 Changes in the Coal Production Volume
and Coal Export/Import Volumes in China
Export volume (right axis)
Production volume (left axis)

1,800

200

Import volume (right axis)

180

1,600

160

1,400

140

1,200

120

1,000

7.8% 6.0%

5.6%

800

80
5.5%

600
400

1.6% 1.8% 1.8% 1.7%

200

2.0% 2.1%

60

2.6% 2.2% 2.6% 3.6%

40
20

0

0
1990

Note:
Sources:

100

1992

1994

1996

1998

2000

Coal export/import volumes (million tons)

Coal production volume (million tons)

2,000

2002

The percentage (%) in the graph indicates the proportion of export volume in coal production volume.
“China Statistical Yearbook” (of the respective years), China Statistics Press; and “China Coal Industry
Yearbook” (of the respective years), China Coal Industry Publishing House.

“Appreciation of the Australian dollar”
With the U.S. dollar’s depreciation, the exchange rate of the currency of Australia, which
is a major coal exporting country, has been on the rise since 2002 (Figure 1-7). The coal traded in
U.S. dollars produced enormous profits for Australian coal producers because of the Australian
dollar’s depreciation and the coal price increase occurred at the same time from 2001 to 2002.
Nevertheless, from the second half of 2002 to the beginning of 2003, coal prices slumped while theAustralian dollar became stronger. Therefore, Australian coal producers faced severe conditions,
not being able to realize the profits they had before. Because of this, they seem to have not beenable to respond actively to the expanding demand, and became incapable of providing timely
supply in pace with the demand expansion.
Figure 1-7 Comparison of the BJI Spot Prices by Currency
BJI spot prices (US$/ton)

BJI spot prices (A$/ton)Exchange rate (US$/A$)
0.90
0.85
0.80

60

0.75
0.70

50

0.65
0.60

40

0.55
0.50

30

Sources:“Coal 2003,” Barlow Jonker; and other materials.

7

Jan-2004

Jan-2003

Jan-2002

Jan-2001

Jan-2000

Jan-1999

Jan-1998

Jan-1997

0.45
20

0.40

Exchange rate (US$/A$) 'BJI spot prices (US$/ton, A$/ton) '70

As a result, the Australian export steaming coal stocks began to a decline in October 2003
as shown in Figure 1-8, and the rise in steaming coal spot prices increased its pace in line with this.
Figure 1-8 Changes in the Australian export steaming coal stocks and the BJI Spot Prices
BJI spot prices (US$/ton)Export steaming coal stocks

BJI spot prices (A$/ton)
10
9

60

8
7

50

6
5

40

4
3

30

2

Coal inventories (million tons)

BJI spot prices (US$/ton, A$/ton) '70

Sources:0

Jan-2004

Jul-2003

Jan-2003

Jul-2002

Jan-2002

Jul-2001

Jan-2001

Jan-2000

Jul-20001
20“Coal 2003,” Barlow Jonker; monthly “Australian Coal Report.”“The United States unable to act as the swing producer”
The United States had played a role of the swing producer, which was to increase the coalsupply to the market when the coal prices boomed in order to contain the price rise. This time,
however, it has not been able to play that role so far. The United States has not managed todemonstrate sufficient exporting capability at this point, because the U.S. dollar retained a strong
tone from 1998 to 2002 and the steaming coal prices have slumped since 1998, causing a decline inexport capacity.
Figure 1-9 Changes in the BJI Spot Prices and the U.S. Steaming Coal Export Volume

Sources:

BJI spot prices

Jan-2004

Jan-2003

Jan-2002

Jan-2001

Jan-2000

Jan-1999

Jan-1998

Jan-1997

Jan-1996

0Jan-1995

5

10Jan-1994

10

15Jan-1993

15

20

Jan-1992

20

25

Jan-1991

25

30Jan-1990

30

35Jan-1989

35

40Jan-198840

45Jan-1987

45

50Jan-1986

50

55

U.S. steaming coal export volume (million tons) 'BJI spot prices (US$/ton)

U.S. steaming coal export volume
60“Coal 2003,” Barlow Jonker; “Coal Information 2003,” the International Energy Agency (IEA) of theOrganization for Economic Cooperation and Development (OECD); and other materials.

8

“Frequent occurrence of natural disasters and accidents”
In 2003, many unexpected contingencies occurred, including frequent coal mine
accidents in China, a decline in production capacity due to heavy rain in Indonesia and Australia(State of Queensland), and reduced export capacity.
(3) Other“A surge in freight”
In the recent coal price hike, the surge in freight since the latter half of September 2003
also contributed to pushing up the coal import price. The freight has gradually decreased since
March 2004 and has almost returned to the level before the hike by June 2004.
Figure 1-10 Changes in Freight Since June 2003
Japan-bound freight (US$/ton)

30
25
20
15
10
5

Sources:

1-Jun-2004

1-May-2004

1-Apr-2004

1-Mar-2004

1-Feb-2004

1-Jan-2004

1-Dec-2003

1-Nov-2003

1-Oct-2003

1-Sep-2003

1-Aug-2003

1-Jul-2003

1-Jun-2003

0Panamax: Australia (QLD) → Japan (Chiba)

Panamax: Indonesia (South Kalimantan) → Japan (Chiba)

Panamax: China (Qinhuangdao) → Japan (Chiba)

Cape size: Australia (QLD) → Japan (Kagoshima)

Freight Investor Services (FIS) Limited; The TEX Report; and other materials.

1-3 Steaming coal supply and demand trends and challenges for stabilizing supply
1-3-1 Growing coal demand in Asia
Coal demand is expected to expand on a premise that coal will continue to be supplied ina stable manner at a lower cost compared to other fossil fuels. Figure 1-11 shows the prospects ofcoal demand in Asia indicated in “International Energy Outlook 2004” released by the Energy
Information Administration (EIA) of the U.S. Department of Energy (DOE). According to this,coal demand is expected to grow in all of the cases (the average annual growth rate from 2001 to2020 is 3.1% for the high economic growth case, 2.4% for the reference case, and 1.7% for the low
economic growth case).
A similar result is indicated in the outlook that was released by the Energy Data andModeling Center (EDMC) of the Institute of Energy Economics, Japan (IEEJ) in March of this9year. Its forecast is close to the EIA’s high economic growth case (an annual average growth rate of
2.9%). The black solid line in Figure 1-11 shows the total of the maximum values ofcountry-specific coal supply and demand prospects made by various organizations of the respective
countries. It indicates the presence of a potential coal demand that greatly exceeds the EIA’s higheconomic growth case.
Figure 1-11 Prospects of Coal Demand in Asia
(million tons)
5,000
EIA’s high economic growth case
EIA’s reference case
EIA’s low economic growth case

4,000

4,260

Potential coal demand
IEEJ’s prospects

3,092
3,000
2,612
2,000
1,922

3,104

2,825

2,656
2,478
2,346

2,041

3,652
3,487 3,661
3,210

2,825
2,579

1,556
1,000
1990

Note:
Sources:

1995

2000

2005

2010

2015

2020

2025

The weight conversion for the oil/coal equivalent is based on 5,000 kcal/kg for China and India, and 6,200kcal/kg for other countries/regions.
“International Energy Outlook 2004,” the U.S. DOE/EIA; “Asia/World Energy Outlook (March 2004),” the
IEEJ; and other materials.

1-3-2 Increase in the production capacity of export coal
According to “Coal Information 2003” of the OECD/IEA, the world’s coal producers
supplied 580 million tons (403 million tons of steaming coal and 176 million tons of coking coal) to
the international market (seaborne coal trade) as of 2002 (Table 1-1). However, their production
capacity of export coal is 700 million tons (504 million tons of steaming coal and 195 million tonsof coking coal), so they have excess supply capacity as a whole.
The OECD/IEA analyzes that an additional export production capacity of 306 million
tons will be achieved around the world by 2007, which will total more than one billion tons
combined with the production capacity of export coal in 2002. Even if the production capacity ofexport coal in 2002 decreases by 30% due to the termination of mining operations at existing mines,
as long as the additional export production capacity is achieved as planned, the total production
capacity of export coal will still be 790 million tons, which satisfies the world’s coal trade of 730
million tons in 2010 (reference case) as predicted by the U.S. DOE/EIA. Nevertheless, the cause of10

concern is that the projects for the 210 million tons, among the additional production capacity ofexport coal, were still in the planning phase instead of the implementation phase as of 2002.
Table 1-1 Additional Production Capacity of Export Coal
Expected to be Achieved by 2007
(million tons/year)
Production capacity of export coalin 2002

Additional production capacity of export coal
expected to be achieved by 2007
Planned
Firm
Firm
Planned newcommitment at commitment additions tominesexisting mines new mines existing mines

Total
production
capacity ofexport coal

Steamingcoal

Coking coal

Australia
China
Indonesia
South Africa
Columbia
United States
RussiaCanadaPolandVenezuela
Vietnam
Other

116.2

121.8

238.0

24.1

25.3

26.3

68.0

143.7

381.7

86.5
88.1
72.5
50.3
20.7
33.4
7.7
14.0
6.1
5.5
2.8

6.7
0.0
4.6
2.1
19.5
6.8
26.0
3.0
2.3
0.0
1.8

93.2
88.1
77.1
52.4
40.2
40.2
33.7
17.0
8.4
5.5
4.6

7.2
6.4
14.1
3.5
2.0

1.0
0.0
0.0
0.0
4.0

0.0
25.5
2.8
16.9
0.0

2.0
13.5
13.9
11.6
0.0

10.2
45.4
30.8
32.0
6.0

Total

503.8

194.6

698.4

Total

0.0
0.0
1.8

2.5
0.0
0.3

3.4
0.0
0.6

10.0
2.0
2.7

15.9
2.0
5.4

103.4
133.5
107.9
84.4
46.2
40.2
47.8
17.0
24.3
7.5
10.0

62.2

35.1

75.5

132.7

305.5

1,003.9

-

3.1

-

2.0

-

0.0

-

9.0

-

Total world export in 2002

402.8

175.9

578.7

Proportion of export volume
to the production capacity ofexport coal in 2002

80.0%

90.4%

82.9%

The world’s coal trade volume in 2010 (reference case)predicted by the EIA

Sources:

14.1-

Production capacity of export coal assuming a 30%
decrease due to closing of mines

Note:

Total

794.4
730.1 (91.9%)“Total world export in 2002” indicates the volume of seaborne coal, and the “production capacity for exportedcoal” is limited to production capacity for coal subject to seaborne trade.
“Coal Information 2003,” OECD/IEA; “International Energy Outlook 2004,” U.S. DOE/EIA.

1-3-3 Risk factors in supplying steaming coal
(1) Diversification of supply sources
Figure 1-12 illustrates the coal flow in 2002. The size of the Asian coal market is 340
million tons, steaming coal and coking coal combined. Australia, China, and Indonesia supply 160
million tons (46%), 80 million tons (23%), and 60 million tons (18%) respectively, supportingnearly 90% of the Asian market.
Such large coal producing countries as China, the United States, and India mainly
produce coal for domestic demand, and their production for export is less than 10% as shown in
Figure 1-13. Since 2001, China has developed into the second largest coal exporter following
Australia (see Figure 1-17 Changes in Coal Export Volumes of Major Coal Exporting Countries onp.19). The changes in China’s export volumes (domestic coal supply and demand situation) haveeven come to affect the world’s coal trade.
Coal is widely distributed around the world except the Middle East as shown in Figure
1-14. However, not many countries are capable of providing stable supply of coal to the11international market. In the case of Japan, almost 90% of the coal supply comes from Australia(over 55%), China (nearly 20%), and Indonesia (nearly 15%).
Figure 1-12 Coal Flow (2002 estimate)

Rest of Europe
4.7Mt

2.3Mt
Poland
22.6MtFormer USSR
40.8Mt25.3Mt

6.4Mt

18.9MtChina
85.7Mt

2.2Mt
7.0Mt

10.2Mt30.0MtAfrica/Middle East
18.4Mt

5.7Mt

Japan
157.8Mt

49.5MtRest of Asia
181.5Mt

46.7MtCanada
26.8Mt9.3Mt

OECD Europe
154.9Mt

6.9Mt

17.4MtNorth America
38.8Mt

1.2Mt

28.8Mt

9.6Mt

OECD Europe
38.2MtUSA
34.6Mt14.4t

16.8Mt89.8Mt

18.6Mt

43.9MtColumbia
34.4Mt66.5Mt10.1MtIndonesia
73.0Mt

8.4Mt

3.2Mt

4.7Mt

Source:South America
19.9MtAustralia
197.9Mt

South Africa
68.7Mt

1.6Mt

5.7Mt

“Coal Information 2003,” OECD/IEA.

Figure 1-13 Production Volume and Export Volume of Major Coal Producing Countries(2002 estimate)(million tons)
1,400

Top: Production volume
Middle: Proportion of exported coal in the coalproduction volume
Bottom: Proportion of coal exported to Japanin the total coal export volume

334
0.5%
0％

400
200

276
71.7%
45.8％

223
30.8%
1.3％
69

198

164
27.6%
14.3％
45

Note:
Source:

Ru
ss
ia

fri
ca
A

So
ut
h

us
tra
lia
A

In
di
a

SA
U

Ch
in
a

0

101
72.1%
25.5％
73

40
85.2%
0.1％

30
90.4%
34.6％

The export volume is indicated in the bar graph as part of the production volume.
“Coal Information 2003,” OECD/IEA.

12

13
36.7%
30.3％

iet
na
m

600

917
3.8%
3.6％

V

800

Ca
na
da

35

Exportvolume

bi
a

1,000

World’s total coal export: 640 million tons
World’s total coal production: 3.84 billion tons

Co
lu
m

1,326
6.5%
33.6％

In
do
ne
sia

86
1,200

Figure 1-14 Coal Reserves

7%
Europe (155.7 billion t)

34%

Russia (157 billion t)

41
%

45
%

31
%

62
%

14
%
2%
3%

16
%
55
29
%
%
China (114.5 billion t)

98%
India (84.4 billion t)

97%
Rest of Africa (5.8 billion t)

South Africa(49.5 billion t)
100%

13
%

15
%

23
%
7%

13
%
40
%

70
%

Rest of Asia (48 billion t)

58
27
%
%
Indonesia (5.4 billion t)
46%

53
Canada (6.6 billion t)
%

47
%

USA
(250 billion t)
6%

94%
Columbia (6.6 billion t)
1%

52
%

Rest of South America(15.1 billion t)
89
%

2%

10
%

Australia (82.1 billion t)

Bituminous
Sub-bituminous
LigniteSource:“Survey of Energy Resources 2001,” the World Energy Council (WEC).

In this manner, only limited producing countries can export coal. From the viewpoint of
stable supply, it will also be important to have such coal producing countries as Russia, Canada,South Africa, and the United States develop into supply sources. Meanwhile, consuming countries
need to clarify matters that need to be achieved for increasing the production capacity for exported
coal of the supplying countries, such as improvement of export infrastructure and development of
new mines for exported coal (including coal exploration), and provide cooperation, makeinvestments, or acquire interests accordingly.
(2) The impact of China’s coal supply and demand on the Asian market“Changes in the coal policy”
China advocates in its Tenth Five-Year Plan to increase coal exports to approximately
100 million tons by 2005, and takes a policy to encourage coal exports. For the past several years,
China has maintained an export volume of approximately 90 million tons as shown in Figure 1-6,
but supply for domestic demand became urgent due to a rapid increase in coal demand within
China, and a lack of coal supply surfaced. Accordingly, the Chinese government announced adecrease in the export volume to 80 million tons in 2004. Furthermore, it issued the Measures on
the Administration of Coal Export Quotas 1 to implement a policy to strengthen control and
1

The Measures on the Administration of Coal Export Quotas is a law to be entered into force on July 1, 2004. After theenforcement, the National Development and Reform Commission and the Ministry of Commerce will jointly decideand allot the annual coal export quotas.

13

adjustment of export volumes.
In the beginning of 2004, the Chinese government changed its course to abolish thefirmly maintained export encouraging policy in order to prioritize domestic demand. The concretemeasures taken are the three measures below. However, these measures are expected to increase
the burden on producers of coal for export and raise the prices of the exported coal. For instance, theprice is expected to rise by US$3.5-4.0/ton when shipped from a mine in the northern part of
Shanxi Province.
(i) Reduction of the refund rate of value-added tax
Steaming coal and anthracite: 13% → 11% (January 1, 2004)
Coking coal and coke: 13% → 5% (January 1, 2004) → 0% (May 24, 2004)(ii) Abolition of the system of exempting railway transportation of coal from payment to therailway construction fund (May 1, 2004)(iii) Abolition of the preferential treatment on port construction fee for use of port facilities for
coal“Coal prices”
Unlike in the international market, the prices for coal are set independently in China’s
domestic coal market. Figure 1-15 shows the BJI spot prices that have been cited earlier and the
FOB prices of steaming coal for the Chinese domestic market that is shipped from Qinhuangdao. In
2002 and 2003, the situation continued to be more advantageous for Chinese coal producers to sellcoal domestically than to supply coal to the international market. During this period, the Chinese
government could not increase the export volume along with the expansion of the production
volume, as pointed out earlier, but it maintained the export volume at the 2001 level by continuing
to implement the export encouraging measures, despite the gap between the prices inside andoutside.
While the Chinese government has announced the coal export volume for 2004 to be 80
million tons, it has already issued export licenses for 60 million tons of coal. Since Chinese coalexports largely depend on the policy indicated by the Chinese government, if a policy to prioritize
domestic demand is taken, the volume of supply to the international coal market will not increase
and will not contribute to lowering the coal prices in the international market. It will be important tokeep a careful eye on the domestic prices of Chinese coal and keep an eye on even the slightest
signs indicating Chinese government’s coal policy.

14

Figure 1-15 Changes in the BJI Spot Prices and Prices of Steaming Coalfor the Chinese Domestic Market
BJI spot prices
FOB prices for coal for the Chinese domestic market (shipped from Qinhuangdao)

50
45
40
35
30
25

Note:
Sources:Jan-2004

Jul-2003

Jan-2003

Jul-2002

Jan-2002

Jul-2001

Jan-2001

15

Jul-200020
Jan-2000

Steaming coal prices (US$/ton)55

BJI spot prices: 6,700 kcal/kg (AD)Prices of steaming coal for the Chinese domestic market: 6,000 kcal/kg (AR)“Coal 2003,” Barlow Jonker; “Japan China Energy Forum - Monthly Report”; and other materials.

“Outlook on coal supply and demand”
Based on the current coal production capacity of China, the additional production
capacity is not likely to catch up with the rapid increase in the domestic coal demand in the shortterm, so the coal supply and demand situation will remain tight for some time. China is consideringa production plan that will meet the future domestic demand in line with the Eleventh Five-Year
Plan. Therefore, the coal supply and demand is expected to become balanced in the medium to longterm by reviewing the current production capacity expansion plan. However, the problem oflimited resources caused by lack of exploration (lack of minable coal reserves due to insufficient
close investigation) is drawing attention, so resource exploration should be conducted promptly inorder to allow continuous construction of new coal mines.
♦ Short-term outlook(i) Priority on domestic demand → This would also affect exports. It may be difficult toexport coal in the time frame desired by consumers.
(ii) There is a risk that the actual exports may not reach the export target of 80 million tons.
(iii) Imports may grow in the southeastern coastal areas.
(iv) Time lag in the development of new coal mines and limits in the transportation capacity→ It would be difficult to expand domestic production to catch up with the demand in
the short term.

15♦ Long-term prospects(i) Production expansion by development of new mines and reinforcement of thetransportation infrastructure → The domestic supply and demand situation may
improve, allowing stable exports.
(ii) The import increase in the southeastern areas may balance the domestic demand andsupply, and the volume of exports from the northeastern areas may increase as a result.
The rapid growth of the Chinese economy lead to a sudden rise in steel demand. In orderto support this steel demand, domestic coal demand is likely to continue expanding in the future. In
the event that expansion of the production capacity cannot catch up with the expected demand, it
could considerably affect the coal supply and demand balance of not only East Asia, but that of thewhole world.
As discussed earlier, the crucial step for avoiding such an event is that China raises its
own coal supply capacity by securing minable coal resources (resource exploration), developing
new mines, and improving the transportation infrastructure. In terms of use, it needs to promoteenergy saving (improvement of the heat efficiency of coal-fired power generation). Japan and other
East Asian countries, which are coal importing countries, should actively get involved in resource
exploration, coal mine development, and improvement of coal infrastructure in China in order tosecure Chinese coal as a nearby source.
In the meantime, China formally joined the World Trade Organization (WTO) as the
143rd member on December 12, 2001. Because of this, there is an observation that China will
reduce the import tariffs on coal (steaming coal: 6% of the CIF price; coking coal: 3% of the CIF
price) to zero by 2005. If this tariff reduction is implemented, the only constraint on China’s coal
imports will be the coal import infrastructure (ports for coal import (unloader, coal yards, etc.) andthe domestic transportation system). Therefore, coal imports may dramatically increase in thesoutheastern coastal areas. In this manner, it is necessary to watch the coal import infrastructure
along with the status of improvement of the coal export infrastructure.
(3) Development of new coal mines in Indonesia
The coal production volume in Indonesia has increased from 340,000 tons in 1980 to
41.32 million tons in 1995, and further to 114.28 million tons in 2003. In addition, its coal exports
have also grown over the past several years due to the price competitiveness of the exported coalpertaining to being closer to Asia’s coal consumption areas than Australia. The export volume has
increased from 31.32 million tons in 1995 to 85.68 million tons in 2003. Among this, the volume
exported to Asia was 66.16 million tons, accounting for about 77% of the entire export volume.
The expansion of coal production progressed with great speed when the Indonesian government

16

began to invite foreign capital under coal contracts of work (CCoW) based on production sharing(PS) in 1981. According to IEEJ’s survey entrusted by the New Energy and Industrial Technology
Development Organization (NEDO), Indonesia will continue to expand its coal production, butsince the coal demand by the domestic electric power sector will also increase with the economic
progress, the coal export volume is expected to hit the peak at around 100 million tons, as indicatedin Figure 1-16.
Figure 1-16 Changes and Forecasts of the Coal Export Volume of Indonesia(million tons)
200
Actual coal production
Forecasted coal production: US$25/ton FOB
Actual coal export
Forecasted coal export: US$25/ton FOB

150

100

50

0
1985

Source:

1990

1995

2000

2005

2010

2015

2020

“FY 2002 Feasibility Study on Coal Development in the Asia-Pacific Region (Indonesia), Forecasts of Coal
Supply and Demand in Indonesia II” NEDO, March 2003.

The important challenges that need to be overcome by Indonesia in increasing its coalproduction and exports in the future are the problems concerning development of new coal mines.
(i) Coal transportation infrastructure
The bituminous coal and low-sulfur sub-bituminous coal reserves in the coastal areas of
East Kalimantan and South Kalimantan, which have a high value as exported products, are alreadyunder development by the first-generation contractors. Therefore, the coal mine districts that could
be newly developed for exported coal would be more inland from the existing development
districts in East Kalimantan and South Kalimantan. Accordingly, it would be difficult to ship coalfrom those districts without improving the transportation infrastructure.
Indonesia cannot be expected to bear all of the funds for improving the coal transportation
infrastructure (railway systems, port facilities including those for export, etc.) due to the limitation infunds, so cooperation from overseas is indispensable.
(ii) Decentralization of authority
A considerable extent of authority came to be transferred from the central government to17

municipalities with the entry into force of the “Regional Governance Law” and the “Fiscal
Decentralization Law” on January 2001. With regard to development of coal resources, theauthority on approval and license as well as supervision and management were transferred to themunicipality, provincial, and prefectural levels. However, the municipalities, to which the authority
has been transferred, are not functioning sufficiently as administrative bodies, so improvements
must be made promptly.
(iii) Forestry Affairs Law
The Forestry Affairs Law, which was enacted in 1999 and entered into force in
September 2000, prohibits any resource exploration and open-cut mining in protective forest areas.
Although underground mining is possible in those areas, aboveground facilities cannot be
constructed, so mining business is practically impossible there. However, the Forestry Affairs Law
has provisions that allow these activities under specific conditions set by the government as
exceptions to the Forestry Affairs Law. At the time the Forestry Affairs Law entered into force,
there were 14 coal mining areas (14 coal producing companies) whose mine sites overlapped withprotective forest areas. As a result of deliberations on exempting these coal districts from the law,
five mining areas were exempted.
When a mining area overlaps with a protective forest area, coal development can nolonger be promoted, and the coal producing company’s investment to date will be wasted, while thecountry’s energy supply plan will also be obstructed. Accordingly, the Ministry of Energy andMineral Resources is coordinating between coal producing companies and the Ministry of Forestry
in order to allow reasonable coal development.
(iv) Withdrawal of international resource companies
The first-generation contractors operating under PS contracts, which supported the
expansion of coal production, must transfer 51% or more of its interests to Indonesian companies(including the central/regional governments) after ten years from starting the commercial
production. If this rule is forcibly implemented, it may hinder smooth coal mine management (fundprocurement, operation management, etc.) and slow down the pace of coal production anddevelopment.
BP and Rio Tinto both completely withdrew from KPC, and BHP Billiton withdrew
from Arutmin (BHP Billiton merely retains 75% of the distribution rights). Many of thefirst-generation contractors are international resource companies that have the know-how of coalmine management, so it is not wise to completely exclude these companies from coal minemanagement. The Indonesian government should take measures to have them participate in the
management in some form.

18

(4) Bottleneck in expansion of coal export in Australia
As shown in Figure 1-17, Australia has commanded the top share in coal supply in theinternational coal market since 1986, and provides a stable supply to the expanding Asian coalmarket. It also greatly contributes to Japan’s coal imports, accounting for almost 60% of the total
coal volume imported by Japan. The problem in the case of Australia is in the transportation
capacity of coal exporting ports. As indicated in Table 1-12, the two exporting ports in the State ofQueensland recorded a handling volume beyond the annual loading capacity in 2002 with theoverall handling volume of ports reaching 95% of the capacity as well. The State of New South
Wales still has some capacity, but demurrage has been incurred in practice. Since the export
volume was increased in 2003, the situation is expected to become even severer.
Figure 1-17 Changes in Coal Export Volumes of Major Coal Exporting Countries(million tons)

Australia

China

1984

1988

Indonesia

South Africa

Canada

USA

200

150

100

50

0
1980

Note:
Source:

1982

1986

1990

1992

1994

1996

1998

2000

2002

The values for 2002 are estimates. Those for 2003 are the preliminary figures released by the respective
national governments.
“Coal Information 2003,” OECD/IEA; and other materials.

Table 1-2 The Actual Export Volume and Export Capacityof Australian Coal Exporting Ports(thousand tons)
Handling volume
in 2002

Annual loading
capacity

70,60089,000

Kooragang

51,100Port Waratah

19,5008,300

Coal exporting ports
in NSW
Newcastle

Port Kembla

Handling volume
in 2002

Annual loading
capacity

Abbott Point

12,60012,00064,000Dalrymple Bay

42,30045,50025,000Hay Point

29,70034,00016,000Gladstone

37,70035,0003000

5000

Coal exporting ports
in QLD

Fisherman Islands

Source:“Australian Black Coal Statistics 2002,” Coal Services Pty Ltd. and QLD Department of Natural Resources &Mines.

19

The demurrage problem at Port of Newcastle is serious. In the middle of March 2004,
demurrage was incurred on more than 50 vessels. Port Waratah Coal Service Ltd. (PWCS)
operating Port of Newcastle found a problem in the railway transportation, so it limited the annual
handling volume (export volume) to 80 million tons, and launched implementation of the capacity
distribution system, a system of allotting export quotas to coal producing companies, from April
2004. The demurrage was reduced to about 10 vessels by early June, but fundamental
improvement and expansion of the coal export infrastructure would be required considering thefuture increase in the coal export volume.
If appropriate investments are made, Australia may be able to expand its supply capacity
relatively easily compared with the other coal producing countries, as shown in Table 1-1. However,unless the above-mentioned problem of export infrastructure is solved, it would become an obstaclein providing a stable supply to the international market.
Meanwhile, Australian coal producing companies have accelerated consolidation throughacquisitions and mergers from 1998 to 2000 when steaming coal export prices continued to slump.
In particular, the reorganization of the Australian coal industry carried out by the international
mineral resource companies referred to as the Big Four, namely, Anglo American, BHP Billiton,
Glencore (Xstrata), and Rio Tinto, and the attention drawn to the four companies by thisreorganization is worthy of note. This reorganization/consolidation was the corporate efforts to deal
with the slump of coal prices, which can be highly evaluated at present for having maintained astable supply framework amidst the price slump.
(5) Other factors♦ The United States:

The United States lacks export competitiveness due to firm domestic
demand and the decline in the export capacity pertaining to the priceslump since 1998.

♦ Canada:

The type of coal that can be supplied to the export market is limited tocoking coal.

♦ Russia:

More emphasis is placed on the European market. The exporting ports
in the Far East region of Russia need to be improved and expanded inorder to expand supply to the Asian market. In addition, the branchrailway lines connected to the trunk railway lines need to be improvedfor developing new coal mines.

♦ South Africa:

The expansion of export capacity is growing stagnant, so exporting
ports need to be improved (Port of Richards Bay is currently being
expanded). The distance of transportation is long to export coal to
Japan.
20

The South African steaming coal exported to Asia was 16 million tons
(35% of the total export volume) in 1990, but the export volume
decreased to 4.8 million tons (7%) in 2002. The country has shifted its
main export destination to Europe. Since 2000, South Africa’s
steaming coal export volume has stayed at around 67 million tons,
which is considered to be one of the factors underlying the recent
stringency in the global supply and demand of coal.

1-4 Prospects for steaming coal prices
While the prime concern is future movements in coal prices and how long the high pricetendency will continue, it is difficult to evaluate these elements quantitatively. This section first
assumes two cases and studies them, after which it indicates the factors for predicting the pricechanges.
(1) Steaming coal prices
With regard to Australian steaming coal in FY 2004, the present spot price, which hasreached US$60/ton, is apparently too high in light of the report that the price revision negotiation for
long-term contracts with Japanese electric power companies was settled at US$45.00/ton. Whenthese are converted into Australian dollars at the rate of 0.7US$/A$, the price of the long-term
contracts is A$64.3/ton, while the spot price is A$85.7/ton. The assumed reason for the continuous
increase in the steaming coal spot price is that consumers are competing over limited coal, because
coal is not immediately supplied as it used to be during times when consumers needed the coal.
This tendency is likely to continue until an ample supply framework is developed, or at least until
the inventories of Australian steaming coal for export accumulate to a level exceeding 7 million
tons (see Figure 1-8).
Considering Australia’s present productivity and the past changes in prices, Australianproducers are likely to be able to secure profits within Australia if the steaming coal prices stay at alevel above the A$40-50/ton range. Because additional supply capacity is expected to be achievedto meet the demand in the coal market, as shown in Table 1-1, coal prices are likely to become
stable at the level when supply and demand balance out. To this end, however, the supply risks
indicated in the previous section must be eliminated or reduced. Only then will a sustainable coalsupply that meets demand be achieved. Table 1-3 shows the conditions for stopping the hike insteaming coal prices, and comparatively studies the case in which the hike stops in the short term
and the case in which it will last in the long term. The results of the comparative study are shown in
Figure 1-18.

21

Table 1-3 Conditions for Termination of the Steaming Coal Price Hike and Its Prospects

1. China’s coal demand

2. China’s coal production

3. Indonesia’s coal minedevelopment for exported
coal

4. Increase in Australianproduction capacity ofexport coal

5. Increase in U.S. export
volume of steaming coal
6. Increase in South Africa’s
export volume of steamingcoal
7. Time of termination of theprice hikeCase 1(Price hike terminated in a short term)
The overheating growth in coal demand willsubside before the Beijing Olympics due tosuch measures as reduced issuance ofgovernment construction bonds and a cut inthe official discount rate for slowing thepresent economic boom, which is referred to as
China’s special procurements.
Although a large increase in coal production
cannot be expected in the short term byconstruction of new large- and medium-sizecoal mines, coal exports will increase as
expanded coal production of existing coalmines for the domestic market will increase
overall production (mainly town and village
coal mines) backed by a rise in domestic coalprices.
With an increase in production at existing coalmines and deregulation of the Forest Affairs
Law, investment in new coal mines will bepromoted and development will makeprogress at an early stage including thetransportation infrastructure.
Investment will be made in line with demand
growth, and an increase in the production
capacity of export coal will be achieved earlier
than scheduled (Table 1-1). At the same time,
improvement of the export infrastructure will
also make steady progress.
Exports of steaming coal to Asia from theWest Coast will be resumed, and export ofsteaming coal to Europe from the East Coast
will increase.
Exports of steaming coal to Europe will
increase, and Australian steaming coal that
intended for Europe will be sent to the Asianmarket.
In about three years

Case 2(Price hike prolongs)
China’s present economic boom andthe pace of economic growth willcontinue at least until Beijing
Olympics, and the speed of growth incoal demand will remain high.
An increase in production cannot be
expected until the completion of newlarge- and medium-size coal mines.
The Chinese government will firmly
maintain the coal policy ofprioritizing domestic demand andimports of steaming coal will
increase.
The Forest Affairs Law will not bederegulated, and development of newcoal mines will not progress.
Therefore, production expansion will
have to rely solely on an increase inproduction at existing coal mines.
Even if an increase in the production
capacity of export coal is achieved
earlier than scheduled, the problem of
the export infrastructure will not be
solved, and the cost will rise due todemurrage.
Steaming coal will only be exported
to Canada, as domestic demand will
be given priority.
Exports of steaming coal will notincrease, and Australian steaming
coal will flow into the European
market.
In about five years

Comprehensively evaluating these analyses, it is expected to take about three years for the
supply capacity to grow to meet the demand growth, though it would depend on the coal minedevelopment in Australia, China, and Indonesia and the status of the improvement in the export
infrastructure in these countries. It is also expected that the prices will recover to the A$40-50/ton
level (US$28-35/ton at the rate of 0.7US$/A$) when the supply and demand become balanced
around that time.

22

Figure 1-18 Forecasts of Spot Prices for Australian Steaming Coal
Actual: BJI spot prices (US$/ton)

Forecast

90
Actual: BJI spot prices (A$/ton)
80
70
60

Case 2 (A$/ton)50

Case 1 (A$/ton)
40
30

Note:

Jan-2008

Jan-2006

Jan-2004

Jan-2002

Jan-2000

Jan-1998

Jan-1996

Jan-1994

Jan-1992

Jan-1990

Case 2 (US$/ton)
Jan-1988

20

Jan-1986

Steaming coal spot prices (US$/ton, A$/ton)100

Case 1 (US$/ton)

The exchange rate for the forecasted prices is fixed at 0.7 US$/A$.

(2) Factors to be noted in understanding the movements in steaming coal prices♦ China’s coal demand and supply trends, coal export/import trends, and coal policy♦ Changes in the volume of steaming coal for power generation imported by Japan, South
Korea, and Taiwan
♦
♦
♦
♦
♦

Changes in the Australian export steaming coal stocks
Status of production/development of steaming coal for export in Australia and Indonesia
Exchange rate of Australian dollar to U.S. dollar
The steaming coal export capacity of Russia, the United States, and South Africa
Oil/gas prices
Although coal prices and oil/gas prices have no clear correlation with each other, a hike inoil/gas prices would increase coal demand due to the price differences, and allow coalprices to rise.

Another important factor for steaming coal is whether or not it can continue to maintainits price competitiveness against rival fossil fuels. As shown in Figures 1-2 and 1-3, the “fluid
revolution” made progress until the 1970s due to the fact easy-to-handle oil could be obtained at
low prices. As a result, the demand for steaming coal declined in Japan as shown in Figure 1-19.
However, during and after the second oil crisis, the price difference between steaming coal and oil
widened, and use of steaming coal increased due to its price competitiveness.
Since steaming coal produces more carbon dioxide when burned compared to other fossil
fuels, it imposes a large burden on the environment. If steaming coal loses its price competitivenessby bearing the cost for reducing the environmental burden, use of steaming coal may considerably23

decrease.
Figure 1-19 Changes in the Volume of Coal Demand in Japan(million tons)

Steaming coal

Coking coal

Anthracite

180
160
Second oil crisis

140
120
100
80
60
40
20

Note:

Source:2001 F

1999 F

1997 F

1995 F

1993 F

1991 F

1989 F

1987 F

1985 F

1983 F

1981 F

1979 F

1977 F

1975 F

1973 F1971 F

1969 F

1967 F

1965 F0

The figures up to FY 2000 only indicate the volume of imported coal based on the “Yearbook of Production,
Supply and Demand of Petroleum, Coal and Coke,” Ministry of Economy, Trade and Industry, and those for
FY 2001 onward indicate the volume based on the “Japan Trade Table,” Ministry of Finance.
“2004 EDMC Handbook of Energy & Economics in Japan” and “EDMC Data Bank,” IEEJ/EDMC.

2. Global Warming Prevention Measures and Coal Use
2-1 Evaluation of fossil fuels based on 3Es
When fossil fuels are evaluated based on the 3Es, economy, energy (stable supply), andenvironment, coal is superior in the economy and stable supply aspects. However, as shown in
Figure 2-2, its evaluation is low in the environmental aspect, since its CO2 intensity is higher thanthat of liquid natural gas (LNG).
Figure 2-1 Evaluation of Fossil Fuels Based on 3Es
Environment(1/CO2 load)
100%
50%

Coal
Oil
LNG

0%
Energy (Stable Supply)(1/coefficient of variation)

Economy (1/price)24

Figure 2-2 CO2 Intensity by Fuel Type
Combustion
140

112.90100%

120(g-C/1,000 kcal)

Production/facilities

Transportation

89.92
80%

100

77.52
69%

80
60

105.28

83.88

40

62.66

20
0
Coal

Note:
Source:Oil

LNG

The percentages shown above the bars indicate the environmental burden of the respective fossil energies
when CO2 intensity of coal is regarded to be 100%.
“Life Cycle Inventory Analysis of Fossil Energies in Japan (May 1999)” (material for the Forum on ResearchWorks), IEEJ.

If the market seeks a fuel mix that maximizes the economy, a stable supply andenvironmental conservation elements, the fuels selected will be those accounting for the minimum
value in the following target function.
Target function = f1 (price) + f2 (cost for environmental measures) + f3 (cost formeasures against supply risks)
While the supply risks are clearly indicated by the past fluctuations in prices (see Figures 1-3), it isobvious in Figure 2-3 that coal accounts for the smallest price fluctuations. Since coal is deemed torequire the lowest cost for measures against supply risks, this report will evaluate coal by focusing
on prices and the cost for environmental measures, in order to make the discussions concise.
Figure 2-3 Coefficient of Variation of Fossil Fuel Prices
Coefficient of variation(standard deviation/average price; 1983-2003)
30
25
20
15
10
5
0

Crude oil

LNG

Cokingcoal

25

Steamingcoal

2-2 Current status of CO2 emissions
Japan’s CO2 emissions were 318 million t-C (tons carbon equivalent2) in FY 2002, which
is an increase of 31 million t-C (9.7%) over the amount in FY 1990. Of these, CO2 emissions by thepower sector (public power supply industry) were 91 million t-C, an increase of 13 million t-C(14.3%) over that in FY 1990. While CO2 emissions from coal account for 32% of Japan’s total
emissions, the proportion is as high as 54% for the power sector (Figure 2-4).
Figure 2-4 Actual CO2 Emissions (FY 2002)
ActualDomestic primary energy
supply (FY 2002)

Difference (FY2002-FY1990)
LNG
13%

318

Coal

Domestic 32%
primary energy
supplyDomestic primary energy
supply (FY 1990)

287

For public power supply
industry (FY 2002)

31

LNG
31%

91

For public power supply
industry (FY 1990)

78

0

Coal
54%

Oil
15%

13

100

For public
power supply
industry

Oil
55%

200

300

400

500

CO2 emissions (million t-C)

2-3 Importance and limits of clean coal technology (CCT)
2-3-1 Increase in coal use by CCT to date
Coal is more difficult to handle compared with oil and gas, and it also carries a large
environmental load (SOx, NOx, particulate matter, and CO2). However, some of these weak pointsof coal have been overcome by innovative CCT. Good examples are the progress in desulfurization,
denitration, and dust collection technologies. As shown in Figure 2-5, the desulfurization,
denitration, and dust collection technologies have achieved remarkable progress compared to 20
years ago, and significantly contribute to the present growth in coal demand.

2

The amount of CO2 emission can be expressed by either tons carbon equivalent (t-C) or tons CO2 equivalent (t-CO2).
The relationship between the two is 1 t-CO2 = 3.67 t-C.

26

Figure 2-5 Progress in the Desulfurization, Denitration, and Dust Collection Technologies
350
300

Power plant M(operating since 1981)

300
260

Power plant I(operating since 2002)

250
200
150

100

100
50

20

20

SOx （ppm）

NOx （ppm）

100

Source:PM （mg/m3N）

The Electric Power Development Co.,Ltd. (now with the trading name J-POWER)

2-3-2 Future of CCT
It is evident that CCT will play an important role in coal use in the future. The main CCTs,
which are expected to be developed and diffused by 2030, are shown in Figure 2-6. The main
CCTs that are to be developed in the power industry include the integrated coal gasification
Figure 2-6 Future of CCT
Future of Energy Society Supported by CCT (2030)

Coordination of energy/materials between industries
Fuel-cell vehicles

Biomass

Coal gasification
Hydrogenation ofcoal

Chemicalindustry, etc.

Hydrogen stations

Powerplants

USC

Blast furnace

SCOPE21

Furnace foradvanced gasification

HyPr-RING
Garbage/waste plastic

Steel industry

Power industry
Steel plants

IGCC

IGFC

CO2 recovery

Upgraded coal
Coal

CO2
sequestration

Source:UBC

Clean Coal Cycle (C3) Study Group, Ministry of Economy, Trade and Industry (METI).

27

combined cycle (IGCC), integrated coal gasification fuel cell combined cycle (IGFC), CO2
recovery/sequestration technology (carbon fixation), and technology to improve the quality of
low-grade coal (upgraded brown coal (UBC)). In addition, development of coke production withadvanced coal conversion process (Super Coke Oven for Productivity and Environmental
enhancement toward 21st Century (SCOPE21)) is expected in the steel industry, whiledevelopment of hydrogen production by recovering CO2 using coal (hydrogen production byreaction integrated novel gasification (HyPr-RING)) is considered as a priority task for a futurehydrogen society.
2-3-3 Anticipations for carbon fixation technology
The carbon fixation technology is a method to separate and recover emitted CO2 andstore it underground. It is a highly anticipated technology for coal, which has high CO2 intensity.
Figure 2-7 shows the trial calculation of the cost of CO2 reduction by present carbon fixation
technology. According to the data, the coal fixation cost is in the range of 18,850-23,170 yen/t-C.
Figure 2-7 Trial Calculation of the Cost of CO2 Reduction by Carbon Fixation

yen/t-C

25,00020,000Injection

15,000Compression
Transportation

10,000
Liquefaction
5,000

Separation/recovery0
Domestic coalmine
Coal-fired(pipeline)

Source:Overseas oil field
Coal-fired(ship)

Domestic coalmine
LNG-fired(pipeline)

Domestic aquifer
Coal-fired(ship)“Energy Economy,” winter 2004 issue, IEEJ.

The effectiveness of CO2 fixation technology is likely to increase by combining CO2
fixation technology and emissions trading. Figure 2-8 shows the trial calculation of cost when
fixation technology is introduced in a coal-fired power plant. As a result of using the value
calculated by the Federation of Electric Power Companies of Japan in January 2004 (5.7 yen/kWh)as the unit price for coal-fired power generation, and the cost in the case of storing CO2 in adomestic aquifer in Figure 2-7 (18,850 yen/t-C = 4.4 yen/kWh) as the carbon fixation cost, the total
unit price for power generation and carbon fixation became 10.1 yen/kWh. If the emissions trading
price rises, it will be possible to expect an income (credits) from selling the CO2 emission
reductions, so the total unit price excluding such credits will be lower. If the emissions trading price28

exceeds the carbon fixation cost (18,850 yen/t-C in this case), the total unit price will be lower thanthe unit price for power generation (5.7 yen/kWh). Therefore, the carbon fixation itself will produce
profits and will widely promote commercialization. If so, carbon fixation may restrain an increasein emissions trading price and, furthermore, the carbon fixation cost could become the upper limitof emissions trading price.
Figure 2-8 Restraining Effect on the Emissions Trading Price
15.0

Upper limit

CO2 credits

10.0(yen/kWh)

4.4
CO2 fixation

5.0
5.7
0.0

-1.2

-2.3

Power generation

-3.5

-4.7

-5.9

-7.0

-5.0

Total unit price

-10.0
0

5,000

10,000 15,000 20,000 25,000
Emissions trading price (yen/t-C)

30,0002-3-4 Effect of overseas diffusion of CCT
There are many regions in the world where CCT has not diffused compared to Japan. If
CCT is also implemented in these areas, a higher CO2 reduction effect can be achieved. It would
also be possible to combine CCT with the clean development mechanism (CDM) or joint
implementation (JI) of the Kyoto Mechanisms (Figure 2-9).
Figure 2-9 Effect of Overseas Diffusion of CCT
Effect of introducing highly efficient, coal-fired power generation (USC, IGCC) in China
CO2 emissions from coal(million t-C)

CO2 intensity of coal
(10,000 t-C/100 million kWh)

Without CCT (with SC)
CO2 emissions from coal (left axis)

Approx. 93 million t-C

With CCT
CO2 emissions from coal (left axis)
With CCT
CO2 intensity of coal (right axis)

Source:Clean Coal Cycle (C3) Study Group, METI.

29

2-3-5 Limits of CCT
At present, the thermal efficiency of gas-fired power generation has improved at a fasterpace than that of coal-fired power generation. As shown in Figure 2-10, the difference between
them is apparent in the thermal efficiency competition in combined cycles or fuel cells.
Figure 2-10 Comparison of Heat Efficiency of Thermal Power Generation
Average (1997)

38

PC

40

PC（USC）

41

PFBC

42

46

IGCC（1,500℃）

54-60

IGFC

53

Gas CC (actual)65

Gas FC

0

10

20

30

40

50

60

70

Heat efficiency (%)

As shown in Figure 2-11, “World Energy Outlook 2002” released by IEA also indicatesthe future superiority of gas-fired power generation in thermal efficiency. Development anddiffusion of CCT is also indispensable for not widening the thermal efficiency gap between coaland gas.
Figure 2-11 Prospects of the World’s Average Power Generation Efficiency

Source:“World Energy Outlook 2002,” OECD/IEA.

There are limits in finding the solution for CO2 reduction only in CCT for suchcompetitive development environments. Therefore, it is important to promote CO2 reduction30

measures by combining CCT with competitive coal prices. As long as it is combined with coalprices, CCT itself would be required to be cost competitive as well. In commercializing CCT, there
would often be cases in which the CCT would economically conflict with the Kyoto Mechanisms,
including emissions trading. In that sense, the market price of emissions trading may become thebenchmark for the CCT cost. In other words, cases may arise where commercialization of a CCT
would be difficult if its cost is higher than the emissions trading price.

2-4 Risks of a shift to gas (coal to gas)
LNG emits CO2 after combustion since its principal component is methane gas (CH4).
Although it is possible to reduce CO2 by shifting from coal to gas, it is also necessary to examine
the risks involved. First of all, the increase in the world’s CO2 emissions cannot be contained
simply by shifting to gas due to the growth in the world’s energy demand. Figure 2-12 shows theeffect of a shift to gas based on the prospects for energy demand released by the U.S. EIA. By
replacing all the coal demand in and after 2005 to gas demand, the CO2 emissions of 6.4 billion t-C
observed in 2000 will be reduced to 5.9 billion t-C by 2005. However, the CO2 emissions will
exceed the 2000 level by 2010, at 6.5 billion t-C. From 2010 onward, the CO2 emissions will
increase at a similar pace as that before the shift to gas. In short, the shift to gas merely has an effectof delaying the increase of CO2 emissions by about eight years.
Figure 2-12 CO2 Reduction Effect of a Shift to Gas
12,000(million t-C) '10,000
8,000
6,000

Coal

4,000

Gas

2,000
0

Oil
1990

2000

2005

2010

2015

2020

2025

Coal

2,317

2,370

0

0

0

0

0

Gas

1,075

1,310

2,992

3,354

3,769

4,203

4,701

Oil

2,488

2,736

2,882

3,191

3,515

3853

4,232

Before the shift

5,880

6,416

6,908

7,685

8,513

9,373

10,361After the shift

5,880

6,416

5,874

6,545

7,284

8,056

8,933

The reserve-production ratio (R/P ratio) for gas is currently 61 years as shown in the leftpart of Figure 2-13. However, if all of the heat supplied by fossil fuels were to be supplied solely by31

gas, the reserve-production ratio would become 17 years, as shown in the right part of Figure 2-13
(R/TFEP ratio; TFEP: total fossil energy production). It cannot be overlooked that a shift to gas
would accelerate consumption of precious gas resources, leaving future generations with depleted
gas resources.
Another concern is that the shift to gas would naturally cause an imbalance in supply anddemand, which would invite a price hike and considerably affect the stable supply of gas.
Figure 2-13 Reserve-Production Ratio and Reserve-Total Fossil Energy Production Ratio

No. of years

250
Coal

200

Oil

Fossil fuels total

150
100

204

50
0

41

61

93

R/P

Source:

Gas

59

17

17

93

R/TFEP“BP Statistics Review of World Energy 2003,” June 2003, BP Downloads Library.

2-5 Economical efficiency of a shift to gas
According to the performance of the public power supply industry in FY 2002, coal-fired
power plants generated 209.3 billion kWh of power and their operating rate (percentage of facilityuse) was 71%. Meanwhile, LNG-fired power plants generated 251.7 billion kWh of power andoperating rate was 48%. Table 2-1 assumes a case in which the operating rate of LNG-fired plants
is increased to 70% and the power generated to 363.6 billion kWh, while the operating rate ofcoal-fired plants is decreased to 33% and the power generated to 97.4 billion kWh in order toequalize the overall power generated to that in FY 2002. Based on this assumption, it obtains thefuel consumption, CO2 emissions, and the variable cost. According to the data, the CO2 emissions
can be reduced by 13.74 million t-C from 77.28 million t-C to 63.54 million t-C. Nevertheless, thecost increased by 350.1 billion yen (25,500 yen/t-C). The variable cost used for the calculation
includes the fuel price, petroleum tax, and utilities among other matters. The cost based on the
results of FY 2002 was 2.73 yen/kWh for coal-fired power generation and 5.86 yen/kWh for
LNG-fired power generation.
Next, a case in which a shift is made from LNG to coal is examined. Table 2-2 shows theresults of trial calculation of a case in which the operating rate of coal-fired power plants isincreased to 80% (the operating rate of LNG-fired power plants drops to 43%) and CO2 emissions
are restrained by carbon fixation technology. While the total variation cost increased to 2,396.5
32billion yen in the case of a shift to gas, the cost in the case of a shift to coal was 1,960.7 billion yen,435.8 billion yen lower than the former. However, there is a need to separate and fix CO2 in orderto reduce the CO2 emissions, which would be 17.1 million t-C higher than those in a shift to gas.
The cost for this separation and fixation was 322.5 billion yen (the unit price for the separation andfixation was 18,850 yen/t-C in this case). Nevertheless, even by including the cost for CO2
separation and fixation, the variable cost in a shift to coal would be 113.3 billion yen (= 435.8
billion yen - 322.5 billion yen) lower compared to a shift to gas.
Table 2-1 Trial Calculation of a Shift of to Gas in Thermal Power Generation(billion kWh)Power generation
facilities(million kW)

Coal-fired

209.3

33.77

71

67,75949,120571.4

LNG-fired

251.7

59.29

48

37,91428,1581,475.0

Total

461.0

93.06

77,2782,046.4

FY 2002 actual

Power generated

Operating rate Fuel consumption CO2 emissions Total variable cost(%)(thousand tons)(thousand t-C)

(billion yen)

Shift to gas (coal → LNG)
Coal-fired

97.4

33.77

33

31,543

22,866266.0

LNG-fired

363.6

59.29

70

54,76540,6732,130.5

Total

461.0

93.06

63,5392,396.5-13,739350.1

Difference

Table 2-2 Trial Calculation of a Shift of to Coal in Thermal Power Generation
Power generated(billion kWh)Power generation
facilities(million kW)

Operating rate Fuel consumption CO2 emissions Total variable cost(%)(thousand tons)(thousand t-C)

(billion yen)

Shift to gas (coal → LNG)
Coal-fired

97.4

33.77

33

31,543

22,866266.0

LNG-fired

363.6

59.29

70

54,76540,6732,130.5

Total (1)

461.0

93.06

63,5392,396.5

Shift to coal (LNG → coal)
Coal-fired

236.7

33.77

80

76,61755,541646.1

LNG-fired

224.3

59.29

43

33,79325,097

1,314.6

Total (2)

461.0

93.06

80,6381,960.7

CO2 separation/fixation (3)-17,099

3,225.0

Total ((2) + (3))

63,5395,185.7

0-2,789.2

Difference ((1) - ((2) + (3)))

2-6

Kyoto Mechanisms (emissions trading, joint implementation [JI], and clean
development mechanism [CDM])
The Kyoto Mechanisms are effective tools for reducing CO2, and they are already
implemented in some quarters. Table 2-3 shows the CDM and JI projects that are approved by theJapanese government, as examples of the Kyoto mechanisms. The total credits resulting from theseprojects have reached 1.83 million t-C/year.

33

Table 2-3 Japan’s Government-Approved CDM/JI Projects
Date ofapproval
Dec. 12,
2002

CDM/
JI
JI

Investor/host country
NEDO
Kazakhstan

2

Dec. 12,
2002

CDM

3

May 22,
2003

CDM

4

Jul. 15,
2003
Jul. 29,
2003

CDM

6

Dec. 3,
2003

CDM

7

May 19,2004

CDM

Toyota Tsusho
Corporation
BrazilElectric Power
Development Co., Ltd.
ThailandINEOS Flour Japan Ltd.
South Korea
Kansai Electric Power
Co., Inc.
BhutanVietnam Petroleum Co
Ltd.
Vietnam
Sumitomo Corporation
India

1

5

CDM

Credits(t-CO2/year)
62,000Investment(billion yen)
2.5

1,130,000

5Rubber Wood Residue Power Plant Project inYala, Thailand

60,000

4.5

HFC Decomposition Project in Ulsan

1,400,000

0.3-0.5500

0.3Project name
The Model Project for Increasing the Efficient
Use of Energy Using a Gas Turbine
Cogeneration System
V&M Tubes do Brazil
Fuel Switch Projecte7 Bhuran Micro Hydro Power CDM Project(applied to represent the E7 Fund)
Rang Dong Oil Field Associated Gas
Recovery and Utilization Project

680.000

Project Greenhouse Gas Emission Reduction
by Thermal Oxidation of HFC23 in Gujarat,
India

3,380,000

Total

Source:0.3

6,712,500(1.83 million
t-C/year)Press release, METI website.

Table 2-4 shows the World Bank’s Prototype Carbon Fund projects in which many
Japanese companies participate. The table indicates that CO2 emission reductions can be purchased
at a relatively low cost of 12.98 US$/t-C.
Table 2-4 World Bank’s Prototype Carbon Fund Projects
World Bank’s Prototype Carbon Fund projects
Value ($)$/t-CO2$/t-C

Signed (13 projects)

CO2 emission
reductions (t)12,690,718

47,530,000

3.75

13.73

Under development (10 projects)

21,830,710

74,650,000

3.42

12.54

Total

34,521,428

122,180,000

3.54

12.98

Value ($)$/t-CO2$/t-C

10,000,000,000

588

19.61

Source:World Bank website.

Japan Carbon Fund concept

Asian region

Source:CO2 emission
reductions (t)17,000,000

Nihon Keizai Shimbun, January 9, 2004.

Table 2-5 shows various organizations’ trial calculations of limit cost for CO2 reductionof the United States, Europe, Japan and the emissions trading price. The data suggests that the CO2
emissions trading price will be very low at 6-36 US$/t-CO2 if emissions trading was conducted
between the Kyoto Protocol Annex B countries, and even lower at 4-24 US$/t-CO2 if emissions
34

trading was conducted including the whole world, with participation of developing countries.
Table 2-5 Effect of Reducing the Emissions Trading Price(US$/t-CO2)

Source:“International Emission Trading - From Concept to Reality,” OECD/IEA.

The CO2 emissions trading balance in 2010 is indicated by a projection using one of casestudying by the CERT model of Grütter Consulting in Figure 2-14. The figure shows that the
supply and demand of the world’s emission reductions in 2010 will be balanced at 768 million t-C,
and the price at that point will be 20.6 US$/t-C. It also indicates that the demand will dramaticallydecline if the United States does not participate in the trading, and the value will become infinitely
close to zero.
Figure 2-14 CO2 Emissions Trading Balance (2010)
Carbon Price (US$/Ton C), 2000 prices

250
Demand Without US
Demand With US

200

Supply150
20.6 US$/t-C
768 Mt

100

50

0
0

200

400

600

800

1,000

1,200

1,400

Carbon Abatement (Mton)

Source:CERT model, Grütter Consulting.

This section has analyzed the possibility of reducing the CO2 reduction cost by using the
Kyoto Mechanisms. The most significant advantage of these mechanisms is considered to be thatthe mechanisms allow the users to choose the place or project in which they can reduce CO2 themost efficiently from all over the world.

35

2-7 Fuel prices and the Kyoto Mechanisms (CO2 reduction)
The CO2 reduction cost can be dramatically reduced by using the Kyoto Mechanisms as
discussed earlier, but it would be important for future coal use to increase the competitiveness ofcoal based on prices + the Kyoto Mechanisms (CO2 reduction). Figure 2-15 compares the total
costs of coal, oil and LNG obtained by combining the actual prices of the respective fuels in FY
2002 with an assumed CO2 reduction cost of 20 US$/t-C achieved by the Kyoto Mechanisms.
According to the data, coal is found to be highly competitive.
Figure 2-15 Fuel Prices and the Kyoto Mechanisms
Fuel price + CO2 reduction cost (yen/toe)

35,000
Unit price for CO2 reduction = 20 US$/t-C
30,00024,51225,0001,512

22,853
1,353

20,00015,00010,0009,243

23,00021,500

2,343
5,000

CO2 reduction
cost
Fuel price

6,900

0
Coal

Oil

Gas

Figure 2-16 shows the total unit price obtained by combining the unit prices for power
generated by newly-established coal-fired and LNG-fired power plants (January 2004; theFederation of Electric Power Companies of Japan) with the CO2 reduction cost. In a scenario in
which the CO2 reduction cost was shifted from 0 to 100 US$/t-C, the cost of coal-fired and
LNG-fired power generation became equal at the point the CO2 reduction cost was 38 US$/t-C. In
addition, the unit price for coal-fired power generation became lower when the CO2 reduction cost
was lower than 38 US$/t-C. The unit price for coal-fired power generation becomes as low as 83
US$/t-C, if the operating rate of the LNG-fired power plant is reduced to 60% since it isimpracticable to operate both coal-fired and LNG-fired power plants at an operating rate of 80%.
In order to purchase CO2 emission reductions of 13.739 million t-C, which is theearlier-mentioned emission reductions achieved by a shift to gas, when the emissions trading priceis 20 US$/t-C, the annual cost would be 30.226 billion yen as shown below.
13.739 (million t-C) x 20 (US$/t-C) x 110 (yen/US$) = 30.226 (billion yen/year)
Petroleum tax has been imposed on coal as well since October 2003, and the tax rate is36

going to rise gradually as shown in Table 2-6. Table 2-6 indicates the tax amount for coal for the
public power supply industry assuming coal consumption of the FY 2002 level. The tax amountwill reach 31.2 billion yen after April 2005, which is almost the same as the above emission
reductions purchase price. The tax amount will further increase to 47.4 billion yen after April 2007.

Power generation + CO2 reduction cost (yen/kWh)Figure 2-16 Unit Price for Power Generation Including the CO2 Reduction Cost
9.0
83US$/t-C
8.0

7.0

6.0

6.8
Coal-fired (80%)

6.2

LNG-fired (80%)

5.7
38US$/t-C

LNG-fired (60%)

5.0
0

20

40

60

80

100

CO2 reduction cost (US$/t-C)

Table 2-6 Petroleum Tax (Public Power Supply Industry)
FY 2002 actual consumption

Petroleum tax (million yen/year)
Oct. 2003 -Apr. 2007 -Crude oil

6,579 thousand kl.

13,421

13,421

13,421

LNG

37,914 thousand tons

31,84836,39740,947LPG

410 thousand tons

328

385

443

Coal

67,759 thousand tons

15,58531,16947,431(230 yen/t)(460 yen/t)(700 yen/t)

61,182

81,372102,242

Total

Note:

Apr. 2005 -Trial calculation of petroleum tax on the respective fuels based on the actual consumption in FY 2002

2-8 The bilateral character of the Kyoto Protocol
The Kyoto Protocol has a bilateral characteristic for Japan: one is the unrealistic
numerical goals and the other is the Kyoto Mechanisms, which are realistic methods for reducing
CO2. The numerical goals take the top-down approach originating from ideals, and they are equal
to wringing a dry towel. It is questionable how much these goals would contribute to global CO2
reduction or to Japan’s national interests.
On the other hand, the Kyoto Mechanisms take the bottom-up approach of implementing
feasible projects one by one without limiting the country or place. If the numerical goals were a dry
towel, the Kyoto Mechanisms would be a well-soaked towel, which is worth wringing.
372-9 Future of coal and its challenges
It would become difficult to use coal as in the past since it would increase CO2 emissions.
Therefore, it will be necessary to use coal while reducing CO2 emissions in the future. This means
using coal based on price competitiveness + competitive CCT + the Kyoto Mechanisms (three
aspects as a set) as mentioned earlier. To this end, the following challenges should be addressedwith more intensive efforts than ever under the cooperation between the public and private sectors.
(i) Stable supply of coal should be reinforced.
(ii) Competitive CCT should be studied, developed, and diffused.
(iii) Japan should take global measures as an insider toward achieving implementation of the
Kyoto Mechanisms.

3. Summary of the Report(1) As history indicates, the basic merit in the use of coal is its price competitiveness.
(2) The present high prices can be attributed to the increase in demand, including the special
procurements by China, and a decline in the additional export capacities of countries due tothe foreign exchange situation. The market-clearing price for Australian steaming coal is
A$40-50/ton (US$ 28-35/ton at the rate of 0.7 US$/A$). About three years will be required
to expand the supply capacity to meet the demand expansion.
(3) Coal demand is likely to stay active mainly in Asia, and the supply capacity for Australiancoal can be expected to increase. However, there are challenges to be addressed inreinforcing the supply capacity of China and Indonesia.
(4) While the future energy market will choose fuels based on price competitiveness, stablesupply, and environmental consideration, coal use will be selected based on the following
three aspects as a set: price competitiveness, competitive clean coal technology (CCT), andthe Kyoto Mechanisms.
(5) A shift to coal could become a fuel option according to the achievements in these three
aspects.

Contact: ieej-info@tkv.ieej.or.jp38