German Brown Coal Mining To Fight Back

BMI View: Although Germany's coal mining sector has come under attack in recent years due to government green initiatives, we expect the industry to prove robust over the years to come. This view is predicated on the fact that German brown coal will remain the cheapest and most reliable fuel for domestic power generation despite measures implemented to cut carbon emissions. The main risks to our outlook are the possibility of cheap coal imports flooding the market and reform of the European Emissions Trading Scheme, which would render German lignite less competitive.

Contrary to our formerly bleak outlook for Germany's coal mining industry, which was predicated on the German government's extensive agenda for carbon emissions reduction, we have revised our position and now expect Germany's coal mining sector to prove robust over coming years. We forecast German coal mining output to grow at an average rate of 0.5% y-o-y from 196.3mnt in 2012 to 202.6mnt in 2018.

The government's phase out of nuclear power will continue to provide opportunities for coal producers, as renewables will be unable to take up the slack. The country's abundant lignite (brown coal) resources will remain the cheapest fuel to fill Germany's power deficit over coming years despite carbon taxation. The floundering European Emissions Trading Scheme has so far failed to disincentivise the burning of coal for power generation and we believe German coal will remain preferable to natural gas for power generation due to the higher anticipated cost of using natural gas over our forecast period to 2018.

German Power Prices Surging
End User Power Prices For Households (LHS) and Industrial Consumers (RHS), EUR/kWh, Reference Month May 2013

Investment Continues To Be Forthcoming

Government measures to curtail the use of coal in power generation will be limited in their efficacy. This has been highlighted by the fact that lignite-fired power plants produced 6% more power in 2012 than in 2011, accounting for 25.7% of Germany's total power production. Subsequently, 2013 became the biggest year for lignite-fired power generation since 1990, producing 26.4% of Germany's total electricity. Consequently, investment continues to flow into brown coal mining in Germany. Swedish energy company, Vattenfall, is forging ahead with plans to relocate villages in the Lausitz region, East Germany, in order to access billions of tonnes of brown coal reserves. The company aims to open a new opencast mine to be operational from 2030-2070, thus indicating the long-term future for German lignite mining.

In the Rhineland, West Germany, RWE produces around 100mnt (million tonnes) of brown coal per annum and has successfully implemented large resettlement plans in order to expand its lignite operations. RWE's flagship mine, Garzweiler, contains a deposit of 1.3bnt (billion tonnes) of lignite, which are to be extracted by 2045.

Europe: Mining Risk/Reward Ratings
Rewards Risks
Industry Country Rewards Industry Country Risks Risk/Reward Ratings Regional Ranking
Russia 67.5 57.2 65.4 58.0 50.0 54.0 62.0 1
Kazakhstan 60.0 64.0 60.8 60.0 57.4 58.7 60.2 2
Poland 47.5 68.2 51.6 65.6 68.5 67.0 56.3 3
Germany 37.5 71.2 44.2 58.0 79.8 68.9 51.6 4
Czech Republic 37.5 64.4 42.9 56.0 63.1 59.5 47.9 5
Romania 37.5 55.9 41.2 62.8 62.4 62.6 47.6 6
Slovakia 35.0 59.2 39.8 62.8 63.5 63.1 46.8 7
Ukraine 42.5 47.3 43.5 57.4 37.7 47.5 44.7 8
Bulgaria 22.5 64.3 30.9 66.8 61.2 64.0 40.8 9
Finland 25.0 47.5 29.5 58.0 44.5 51.3 36.0 10
Sweden 22.5 43.8 26.8 60.0 41.8 50.9 34.0 11
Scores out of 100, with 100 highest. Source: BMI

Regional Employment A Considerable Factor

The power of the lignite lobby and the vast number of jobs associated with the industry are key factors that will allow brown coal mining to remain robust over coming years. Many industrial towns in the Lausitzer region are totally dependent upon the coal industry as the main provider of jobs and revenue. In 2013, a petition for the expansion of opencast lignite mining garnered 60,000 signatures in the region. Many existing mines have enough reserves to sustain mining for at least another 30 years, which represents another generation of employment for local citizens.

Brown Coal Won't Give Up Without A Fight
Germany - Mining Industry Value (US$bn) & % Growth y-o-y

Cheap Coal Import Threat

One risk to our forecast for modest growth in German lignite production over coming years is the threat of cheap coal imports, which is currently affecting other European players. Alternatives to German brown coal will be provided by the increasing availability of US coal, displaced by the shale gas revolution in the United States and supplemented by growing supply from South Africa as well as steady supply from traditional exporters, Russia and Colombia. Nevertheless, thus far German domestic coal production has held up well in the face of seaborne competition, with the UK and the Netherlands soaking up the largest share of US coal exports over the past few years.

European Coal Thirst
United States - Coal Exports To Select Countries (thousand short tons)

ETS Reform Risk

The key risk to our forecast remains the potential for reform of the current EU carbon tax and trading system. The German government has maintained its target of reducing CO2 emissions by at least 40% of 1990 levels by 2020. Chancellor Angela Merkel has indicated that she would countenance a 'unique' intervention in the flailing European Emissions Trading Scheme (ETS) to remove 900,000 carbon permits. That said, although we see potential for some reform to ETS system in 2014, a significant change in price incentives would be necessary to reverse the resurgence in regional coal demand. For instance, we believe the ETS unit price would need to rise towards EUR40/tonne to have a material impact on our forecasts, from a current price of around EUR4/tonne.

Germany - Coal Production & % Growth
2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f
Coal Mine Production (mnt) 182.3 188.6 196.3 199.2 200.0 200.6 201.0 201.6 202.6
% Growth y-o-y -0.7 3.4 4.1 1.5 0.4 0.3 0.2 0.3 0.5
e/f= BMI estimate/forecast. Source: EIA, BMI
This article is tagged to:
Sector: Mining, Power
Geography: Germany

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