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Abbott bets house on coal, as price crashes. And Plan B is?

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As Prime Minister Tony Abbott celebrated the promised axing of the carbon price and the re-focus of Australia’s economic future on the extraction of fossil fuels, the market price supporting his economic blueprint is in the process of collapsing.

The price for thermal coal has plunged more than 10 per cent in the last two months as the presumed major customers – China and India – make it clear that renewable energy is offering a competitive alternative to coal and gas.

Abbott has made much of wanting Australia to be a global energy superpower, providing cheap energy to the growing markets in the Asia-Pacific region and beyond.

But there are a couple of problems with this. One, the world does not want so much of Australia’s coal as Australia would like to think. China has dramatically cut its coal needs, and may cease importing in a few years, and India is now following.

That means that the international market price for thermal coal is now becoming so cheap that Australian coal producers are unable to dig it out of the ground and ship it overseas without losing fistfuls of dollars.

coal price

This graph, from Business Insider, indicates how various factors – lower demand and increased production from producers desperate to sell – has caused the price of coal – Australia’s biggest export commodity – to plunge another 10 per cent in the last two months.

Thermal coal is now sold below $70 on the spot market, well below the mark for Australian producers to make money, let alone the cost of production and the level to get the finance for the massive new projects Abbott is hoping to encourage.

Despite this, there are reports that India’s Adani has convinced South Korean group Posco to help build a $3 billion train line to flood the market with even more coal. Adani has still to explain how it will source another $10 billion to build an export terminal and the mine itself.

Analysts are as gobsmacked about this news as they are about the carbon price removal. “This project requires a thermal coal price well in excess of US$100/t to be commercially viable – it is currently sitting at US$60/t- US$70/t,” says Tim Buckley,  IEEFA’s Director of Energy Finance Studies.

He said flooding the market will push prices lower – around 20 per cent below current commodity analysts’ projections. “This must surely send a shiver down the spine of any investor who has their money in global coal debt or equity investments, and rightly so,” Buckley said.

The one commodity that is in demand is LNG. But because that means that Australian gas will be used for export, local prices will now double – or perhaps triple – to meet export price parity (minus liquefaction and transport costs). This will see Australian energy prices soar.

This was not the only fly in the ointment of Abbott’s grand economic and climate plan:

In the same week that Australia became the first country to dump its carbon price, and environment minister Greg Hunt hailed the imminent arrival of “cleaner coal”, the rest of the world is indicating it is accelerating its move towards cleaner and greener technologies.

The incoming president of the European Commission Jean-Claude Junker said he wanted Europe to lead at the upcoming global climate change talks, and said he supported much more ambitious targets for emission reductions, energy efficiency and renewable energy.

“We need to strengthen the share of renewable energies on our continent. This is not only a matter of a responsible climate change policy. It is, at the same time, an industrial policy imperative if we still want to have affordable energy at our disposal in the medium term. I strongly believe in the potential of green growth. I therefore want Europe’s Energy Union to become the world number one in renewable energies.”

“I would also like to significantly enhance energy efficiency beyond the 2020 objective, notably when it comes to buildings, and I am in favour of an ambitious, binding target to this end that continues the current energy efficiency pathway. I want the European Union to lead the fight against global warming ahead of the United Nations Paris meeting in 2015 and beyond, in line with the objective of limiting any temperature increase to a maximum of 2 degrees Celsius.”

The lead climate change negotiator for China, Xie Zhenhua, the vice chairman of China’s National Development and Reform Commission, said China would soon announce an overall cap on emissions, a key step towards its ambition to introduce an economy-wide emissions trading scheme. Zhenhua said China would announce “very ambitious” carbon dioxide goals. That, of course, means much less coal burning than forecast.

“We’re hoping the contribution can be announced in the first half of next year; perhaps in the first quarter. The capping year might be included in that statement and if there is a capping statement, I hope and believe that would be a very ambitious one.”

In India, a budget that focused on solar technology - the building of “mega” capacity solar farms, off-grid solar pumps for irrigators, solar installations over canals, cuts in tariffs for solar components and a doubling of the tax on coal – has been followed by an announcement that the country will look to expand a “rent-a-roof” program from solar installations initially begun in Gujarat, the home state of new PM Narendra Modi, who has promised a “saffron revolution” of solar power.

Tata Power, the energy offshoot of the country’s largest industrial group, also said it would provide “interest free” financing for up to $4,000 to help middle class consumers install solar power in their homes. The scheme will be rolled out in 20 Indian cities before being expanded nationally.

Bloomberg New Energy Finance last week predicted solar would beat coal plants on costs by 2020, resulting in high penetration of solar power in those nations’ rapidly growing grids, and much less coal-fired generation than presumed. AllianceBernstein has previously warned of “energy price deflation” as a result of the growing impact of solar, and the fact it was demonstrably cheaper than many fossil fuels in many countries.

In the world of global finance, the market for climate bonds – financing linked to clean energy and other climate change solutions – is estimated to have reached more than $US500 billion, triple estimates of just two years ago. The actual “green bonds” market has jumped five-fold to $US35 billion in just 12 months.

Sean Kidney, CEO of the Climate Bonds Initiative said:  “Investors are concerned about climate change. This report shows how they can invest in climate bonds without risk. The investment opportunities we find are safe and secure investment grade bonds. This is a Dull Green Market – just how pension funds and insurance funds like it.”

As an illustration, US chemicals maker Albermarle launched a $6.2 billion bid for specialty chemicals and advanced materials company Rockwood Holdings, as it to build a market leading position in lithium and the rapidly emerging electric vehicle and home and network battery storage market. It is the largest such play in the clean energy market to date. As on industry analyst noted of the corporate play, as Australia killed its carbon price: “Money talks, bullsh*t walks”.

Meanwhile, in Chile, a whole series of large scale plants have been announced. First Solar has just gotten a $230 million loan for a 141MW solar PV project, Acciona has begun construction of a 300MW solar project, Abengoa is building a 110MW solar thermal with storage project, SunPower is completing its 70MW Salvador project, while SunEdison has just obtained $190 million in financing for a 73MW solar project, to follow on from the 100MW and 50MW projects it has already completed.

In Ghana, construction has begun on a 155MW solar plant that is expected to “change the way African governments think about the future of energy.” South Africa has installed more than 500MW of solar power already, and has signed contracts for a total of 64 projects 3,900MW of wind, solar PV and concentrating solar power to be built in coming years.

 

 

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  • MrMauricio

    Abbott-what a visionary!!! Suffer Australia!!!

  • Blair Donaldson

    Once again, Tony Abbott proves to one and all that when you want a sound financial manager running the country, the wise shouldn’t choose him. Our prime ministerial moron is going to cost us dearly.

  • johnnewton

    The really good thing about this politically but not for the country – is that the house Abbott has built is going to come crashing down in his head really quickly

    • wideEyedPupil

      I expect Abbott and Hockey will just move on to a new set of lies and fabrications like they did as soon as they won the election.

      • johnnewton

        Do you think we’re really that stupid we’d fall for it again? Check the polls

        • wideEyedPupil

          They fell for Abbotts raft of “non-core” promises just like they did for Howard and Newman. What makes you think the swinging voter public show any signs of organised thought beyond mob-rule? And Howard got back in afterwards. I agree Abbott is on the nose but I wouldn’t underestimate the public’s gullibility nor overestimate the ALPs competancy.

    • Emily

      Yep, you can only deny reality for so long. But don’t worry, it will still be All Labors Fault.

  • johnnewton

    BTW anyone seen the cover of today’s Terror? Absolute disgrace.

  • michael

    any thoughts on how the drop in demand put forward for fossil fuels will impact the supply/demand pricing? if demand is seriously downgraded and it pushes prices ever lower (see graph top of article), doesn’ this drive coal fired power ever cheaper due to the fuel being the major component of its LCOE? I would guess one scenario being this could drag out the transition to solar/wind due to price signals. or is the reduction in demand not big enough to cause a difference in the medium term?
    Most pro-renewable cost arguments are based around increasing costs of fossil fuels, which intuitively makes sense.
    (purely economic question, not related to morality of burning coal and future generations etc)

    • http://www.reneweconomy.com Giles

      Only marginal. The price we talking about here is the sale price for coal mines here. They need to sell at a profit, otherwise not worth digging. And they are not getting it. To get the generation price, you need to first add the shipping cost, and then freight costs. And then add the financing costs for new generation, which will be killer for fossil fuels going forward, By which time the cost of coal fired generation has risen above that of competing renewables.

      • Blair Donaldson

        Giles, is there a particular price we should be looking for that will signal the nail has been well and truly driven into the coal coffin? A price that coal will not be able to recover from. Do the domestic and export prices for coal vary greatly?

        • juxx0r

          Check here:

          http://www.macrobusiness.com.au/2013/06/where-are-we-in-the-coal-bust/

          Coal cost/production curves shown, check australian producers on same graph.

          • JonathanMaddox

            Cost/production curves shown only for slated projects in major exporting countries. None for China which remains the world’s largest coal *producer*, despite having ceased to be a net exporter six or seven years ago, and itself has numerous new projects especially in Western China, some of them at a very large scale indeed, despite the forced closure of many older Eastern Chinese underground mines in recent years.

            Competition from Chinese production *must* be taken into account, despite its absence from charts such as those in the linked article.

        • michael

          are you asking about australian coal exports not recovering? coal itself will be fine for a while, all the brand new coal power plants in china in proximity to mines will be running for a long while yet!
          wonder if there’s a good new source to update the estimate 550GW (or thereabouts) of new coal generation capacity forecast in around 2012 for China going forward

          • Blair Donaldson

            Among other things I was curious as to what the respective prices might be for export and domestic coal. I realise it will still be used for some time to come. Cheers.

          • michael

            rough numbers thrown around i’ve seen, say $75-80/tn australian producers (put shipping and royalties on top) vs $80-$100 cost for domestic chinese, so once you ship it the locals are starting to win over in China vs our export material. If AUD falls dramatically ove rth enext 1-2 years (who knows?!) then local production will get a massive lift from that, lots of variables in the mix. also been extensive cost cutting at the big australian mines over last 3 years, so they should be improving their ability to hang tough until prices rise

          • Blair Donaldson

            Thanks Michael

      • Askgerbil Now

        Almost a third of Australia’s annual coal output is mined at a loss. (About 100 million tonnes out of 350 million tonnes per year.) – “One-third of Australia’s coal mining operations are operating at a loss,
        according to internal estimates from mining major Glencore.”

        This coal is only produced because “take-or-pay” contracts on rail freight increase the magnitude of the loss if the mines close. The owners are hoping the coal price will increase before they run out of investors’ funds to keep their loss-making mines open.

        As the coal price falls, increasing numbers of coal mines will become unprofitable.

  • Dave

    So, I can see in the reasonably near future, the States and Commonwealth having to buy back the sold-off power stations and nationalise the (what’s left) coalmines to fuel them, OR, leave part of the country in the dark, ie those that haven’t invested in renewable energy sources. Still, half the country is still living in the dark ages anyway I guess!

  • Alen

    Thank you Giles, I needed to hear some positive and encouraging news and that others are honest in their intent, and are maintaining or increasing their commitment towards climate action after yesterday’s ETS repeal by the Senate.

  • bedlam bay

    Toxic Tony’s cargo cult and ideological fixation won’t take long to crash. The emperor has no clothes. He and Joe are clearly unfit for high office. The public already know this but their colleagues are taking too long to come to this conclusion.

  • Bucketonickels

    There will still be demand for coal. It just the assets on the books that will come into question.
    Hopefully Abbott will push more people towards going off grid, which looks like it could be a reality, sooner than expected.

  • sswam

    I’m very happy if the price of coal is dropping.
    Even if that would mean a depression for Australia (where I live).

    • Tom Rainsford

      Not necessarily; the government and private companies could begin work on large-scale renewable energy programs and begin employing to have a smooth transition from coal to solar (for example).

  • Tony Pfitzner

    “Greg Hunt hailed the imminent
    arrival of “cleaner coal”,”
    If Hunt means carbon capture and storage underground, he should stop pissing on the graves of long dead physicists, and remember the First Law of Thermodynamics.

    As a result of this inconvenient truth it requires about 30% of the power generated from coal to compress the resultant CO2 to a phase suitable for transport or pumping.

    Power from such a CCS power station would cost a lot more, and I doubt whether any investor or banker would be interested in it – apart from possibly a dumb Australian taxpayer contributing to Hunt’s so called Direct Action Slush Fund. The power industry itself hasn’t invested in it, despite support from both sides of politics.

    (Someone should come up with a better name than Direct Action Slush Fund – the acronym DASF doesn’t exactly roll off the tongue.)

    • Blair Donaldson

      That’s what I keep asking anybody who proposes the fiction of “clean coal”. They all seem to expect the various processes, transport and injection into ground to happen without requiring any energy input.

      When you point out age of these actions requires substantial energy input, a strange look of realisation dawns on them – well, some of them.

      Greg Hunt has to be the most oxymoronic environment Minister we have had in some time.

      • wideEyedPupil

        Didn’t help to have the Climate Institute promoting it for so long. They save they only support it with biomass now. Which means what I am not sure, Biochar. Anyhow they made a video some years ago paid for by Shell talking about how great CCS is bolted onto coal plants. Off course most existing coal plants don’t even except the bolt on CCS machinery even if it wasn’t energy intense.

        • Tony Pfitzner

          Even if you convert the CO2 to biomass – I suppose they mean algae – this is still only deferring the evil day when the fossil CO2 is released into the environment. There may well be an argument for biomass fuels, e.g. for aviation and heavy transport, and for biochars, but they should recycle atmospheric, not fossil, CO2.

          • wideEyedPupil

            I think they mean burning forests to make syngas and biochar. Perhaps algae, Algae miles off if it ever makes it. Interviewed an algae engineer with a modest breakthrough for the BZE radio show recently and he wasn’t promising any kind of revolution that’s for sure.

    • wideEyedPupil

      Well you were in the right track with “slush”. Hunt has got all jazzed about a prototype for a process that makes a slurry of coal and water and then burns it in a Diesel engine. And apparently it’s 40% less emissions than coal (not sure if brown or black coal was the reference). And it’s only 3 to 5 years away from commercial deployment. Now where have I heard that before. Total crock and will never fly if little things like emissions vs energy output and LCOE matter at all.

      • Tony Pfitzner

        You must be kidding.

    • Stephen Cairns

      How about – No Alternative Direct Action?

  • Chris Marshalk

    Abbotts plan B Is to bury your head in the sand.

    • wideEyedPupil

      Plan C is to remind voters they don’t actually care hat much as long as they can get ahead financially this year.

  • Vic
  • gus

    Of course there’s no plan B. Abbott’s brief is to wring the last profits possible from coal for his mining constituents until he is stopped. If everything else is run into the ground in the process, that is of no consequence. No light at the end of the tunnel as long as the present government is implementing policy. Single issue party.

  • Mr. Sanchos

    I for one can’t wait for the mining industry in this country to collapse. Several of my mates picked engineering at uni and went straight into the industry and are now making a mint. I would like to see them fall on their ass it’ll be good for em.

  • Rob G

    This really highlights the arrogance of this government – even with all the will power of Rupert M and the coal lobby, the market will and have ultimately decided the fate of coal. What a terrible blunder it’s turning out to be.

  • Boydist

    Australia should and could be a world leader in renewable energy technology and be a pivotal country in the search for alternatives for when oil is no longer plentiful – which will be a very dark time for humanity if we don’t have a viable replacement. The dinosaur Abbott is standing in Australia’s way. He must change or go.