As state governments and developers scream for approvals to allow them to dig up their fossil fuel reserves, and mainstream analysts warn about an impending market crunch, the focus is turning to financiers and funds managers on a simple question: Can they get their timing right?
Today, Fairfax newspapers are reporting that the Queensland state government is putting pressure on Canberra to fast-track approvals for coal mines and the world’s largest coal port.
The story comes one day after the world’s biggest trader in thermal coal, Glencore Xstrata, scratched the development of the massive Wandoan coal mine, and after from Citi joined other mainstream broking houses at Deutsche Bank, Goldman Sachs and HSBC to warn that the boom in coal demand is coming to a rapid close.
Caught in the middle are bankers and financiers and other companies – such as the rail group Aurizon – who are pondering whether to invest billions of dollars in what could be stranded assets, be they coal mines themselves, rail links or port infrastructure.
Do they believe, like Macquarie Bank, that the coal era will come to an end, but possibly in 20-30 years time? Or do they take stock of what Citi and others are saying and conclude that it is probably already over, thanks to the rapid changes within China, the world’s biggest coal consumer?
Simon O’Connor, CEO of the Responsible Investment Association Australasia, says it is clear that investors are starting to think about this. “We have a convergence of an environmental issue and a commercial issue where both cases are pointing in the right direction,” he told a forum in Sydney this week. “And the answer is we have to shift away from building these kind of assets.”
“This a dollar and cents thing for investors, and that is what they are doing …. And it is well and truly on their radar.
“But the investors are debating what is the right response, re timing. It’s pretty much accepted that there is a high risk …of a massive devaluation of fossil fuel companies as they get to a point where they can no longer sell the coal they have underground on their balance sheets, and there is a high likelihood of stranded assets out there.”
O’Connor said these potential stranded assets include mines and infrastructure such as highways, transmission lines, railways lines and port facilities.
Because of the way that funds managers work, dumping of such investments is not the answer they come up with, he said. They are waiting for concrete signals, such as caps on emissions or pollution, and betting that this is still several years away.
“That’s a real problem,” O’Connor says. “Most of them are betting that there is still value over the next few years, that there is still value to be made. They are betting that they will pick the point in time before the change happens. Just like the GFC.” He said this was part of the complexity of the funds management business.
Organisations such as 350.org are pushing funds to divest their stakes in companies associated with coal mining to accelerate the transition, hoping for a repeat of the tactics deployed by opponents of South Africa’s apartheid regime, and against Big Tobacco. So far, however, only a handful of ethical funds and church-based funds in Australia have responded, although more are considering it.
Trevor Thomas, from Ethinvest, says the risk of divestment is actually low for super fund managers, because the “tracking error” is also low. Funds managers tend to focus on the performance of peers, and are reluctant to do much that will change that. But he said the thermal coal component of most portfolios was extremely small, and would cause minimal variation in performance. It might actually cause an improvement.
Ian Dunlop, a former head of the Australian Coal Association, predicts that the death rattle of the fossil fuel industry will become increasingly nasty in the coming years.
Dunlop is not convinced that market forces will do the job, because the severity of the science is not understood. “We have solutions but we have to move to an emergency response,” he told the forum.
“It does require an emergency war footing. I know people don’t like talking about it, but we need to do it. Divestment is a an essential part of the acceleration of the process … but the problem is more urgent than anyone is saying in this country.”
Dunlop says the fossil fuel industry is moving increasingly into unconventional gases and oils, where the energy return on investment is dropping dramatically. “It used to be 100:1 and 50:1 at the end of WWII. On average it is 20:1 today, and the new unconventional technologies are all under 10:1. If you want to run an industrial civilization then the minimum is about 10:1 otherwise you don’t have enough surplus energy to keep the economy running.
“Why are we continuing to explore and why are we continuing to invest in fossil fuel countries. Official solutions are not working, like CCS. The emissions are locked in, we have a fundamental leadership failure on the policy level.”
