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COLUMN-Asia's thermal coal trade faces threats, with LNG the silent assassin: Russell

Clyde Russell

Russell@ (The opinions expressed here are those of the author, a columnist for Reuters.)

NUSA DUA, Indonesia, June 25 (Reuters) - Everywhere Asia's coal industry looks it sees headwinds, from the current slump in prices induced largely by oversupply, to the lack of financing available for new projects, to the risk of restrictive regulations and the rise of cleaner energies.

But perhaps the biggest risk in most of Asia, home to the world's top four importers and two biggest exporters, is from liquefied natural gas (LNG), the super-chilled fuel that is expanding rapidly versus a largely moribund coal sector.

Perhaps the surprising thing at this year's Coaltrans Asia event, held this week on the Indonesian resort island of Bali, was that most of the delegates didn't seem too concerned about LNG, or rising pipeline supplies of natural gas from central Asia and Russia to China.

There was plentiful focus on renewables and whether coal still had a long-term role to play in growing the region's power generation, or whether wind and solar would eat their lunch.

But when it came to LNG, the general view was that the super-chilled fuel will be too expensive to be viable in countries that are planning to expand electricity generation through power plants that will run on imported commodities.

While this may currently be the case, the trends already underway would seem to be swinging the pendulum in favor of LNG over coal, even for power generation in Asia.

Consider the following case. You are in a country like Vietnam or Thailand and you plan to build a thermal power plant with about 500 megawatts of capacity and you have to decide whether it will run on imported coal or LNG.

While coal is currently more cost-effective, this is a 40-year asset so an investor will have to take a long-term view.

Most of these power plants would look mainly at running on Indonesian coal, given the closer location and generally cheaper prices than for thermal coal from Australia, South Africa or even further afield such as the United States and Russia.

But the Indonesian government also plans to build some 20 gigawatts of coal-fired power in the coming 15 years, and is increasingly forcing domestic miners to set aside more of their output for the local market.

Not only does this lower the amount of coal Indonesia will be able to export, it's also possible that Indonesia's total production will slip in coming years, as coal miners struggle for revenue since selling domestically isn't as lucrative as exporting.

It's also becoming harder to develop new mines in Indonesia given ongoing regulatory uncertainty over mining licenses and increased environmental and land acquisition costs.

One senior executive at a major Indonesian miner attending the Coaltrans event said that financing is becoming "very difficult," with banks reluctant to lend to the industry.

ADANI'S AUSTRALIA LESSONS

Australia, the world's second-biggest coal exporter behind Indonesia, is also becoming a harder place for coal miners to do business, notwithstanding the surprise re-election of the coal-friendly Liberal-National coalition in last month's federal election.

The struggles of India's Adani Enterprises to get its Carmichael mine in Queensland state approved and built is a case in point.

While Adani has secured all the necessary environmental approvals, it has yet to obtain any outside financial backing and will have to use its own capital if it does build the mine, capable of producing 8 to 10 million tonnes per year.

Even if Adani does finally export coal, its torturous experience has likely put off other would-be developers of greenfield thermal coal mines in Australia, meaning that over time it's likely that exports will gradually trend lower as existing mines become exhausted.

The third major supplier of coal to Asia is South Africa, and its unlikely that it will boost exports in coming years, mainly due to capacity constraints in its rail system, but also because it also has increasing domestic demand that the government will prioritize.

While Russia and the United States can certainly add more tonnes to Asia's thermal coal market, the question for power plant developers is whether they want to rely on these supplies.

In contrast, LNG supply looks to be expanding rapidly in the coming decade, as oil and gas majors across to globe rush to bring projects to final investment decisions.

Recently, new projects have been sanctioned in Mozambique, the United States, Canada and there are many more on the verge.

It's quite possible that the global LNG market could double within the next decade, while the seaborne thermal coal market thinks a fabulous outcome would be to remain static, and most players expect a gradual decline from the mid-2020s onwards.

A 40-year generation asset needs certainty above all else, and it appears that LNG may be the safer bet in Asia.

Throw in the risk of increased global action against carbon emissions as parts of efforts to mitigate climate change, and the risks start to rise further for coal.

LNG also has the advantage of being a more flexible fuel for Asia, given countries use it in different ways, with more industrialized nations such as Japan and South Korea focusing on power generation, China on industry and replacing coal-fired heating, while in other countries it has been gaining traction as household energy and in transport.

While renewables are likely to grab an increasing share of growth in Asia's electricity generation, the next wave of LNG is likely to be more effective at pushing coal out of the region's fuel mix. (Editing by Christian Schmollinger)