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Landmark US-China climate deal to half thermal coal trade: WoodMac

The state of the coal market

Trade in thermal coal—a key fuel in electricity generation—is likely to fall 40 percent in the next two decades after the U.S. and China signed a climate deal over the weekend, Wood Mackenzie said in a report released Tuesday.

The COP21 compact that was formally ratified by the U.S. and China this month aims to keep temperature increases to "well below" 2 degrees Celsius. The deal had already agreed by nearly 200 countries in Paris last December.

A 2 degree Celsius limit on temperature rise would mean a sharp reduction in the share of coal-fired generation to 16 percent by 2035 from 41 percent in 2013, added Wood Mackenzie. Seaborne coal import demand into Asia, Europe and the Americas will shrink 40 percent.

That is expected to upend the rally in coal prices this year.

Thermal coal is one of the commodities to have witnessed a price rally this year on the back of Chinese demand as the world's second-largest economy moves to cut domestic over-capacity, spurring imports.

Australian thermal coal prices from the port of Newcastle have jumped around 35 percent from mid-June to around $70 a metric ton now.

"Although the impact on prices is hard to predict in a carbon-constrained world, they will undoubtedly will be lower," said Wood Mackenzie's research director for global coal markets, Prakash Sharma.

About 527 million tons of thermal coal will change hands by 2035, down from 900 million tons this year, said Wood Mackenzie.

Wood Mackenzie's analysis shows prices would likely fall significantly and stay below $50 per ton long-term post-2020, possibly leading to massive industry consolidation.

Higher quality Australian coal exports will be less impacted than other major exports such as coal from Indonesia. Thermal coal exports from Down Under will fall to 135 million tons by 2035 from 210 million tons in 2016, said Wood Mackenzie.

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