The headlines this morning were impressive. “China dumps our dirty coal,” trumpeted the Sydney Morning Herald, in response to news that China was looking to impose import rules that could disqualify much of Australia’s coal because it was of such lousy quality.
It was a story studiously ignored by the right wing Australian newspaper, and buried surprisingly deep in the pro-business Australian Financial Review – considering the massive implications for the country’s second biggest mineral export, and the fate of tens of billions of planned infrastructure.
Whether these rules prove to be so damaging or not, it is yet another development that has underlined the fact that the reign of coal is in terminal decline. China has signalled that it will cap coal consumption and cease to be an importer, as it focuses on cleaner generation. India is baulking at the infrastructure nightmares of coal and focusing on a “saffron revolution” instead, boosting solar. The US is likely to scrap one quarter of its coal generation within the next five years.
As Goldman Sachs said in a report just a few months ago, the window for profitable capital spending in new thermal coal mining and infrastructure capacity “has closed.” Numerous other reports from leading investment banks have supported that view. Even the International Energy Agency has questioned the wisdom of more coal investment.
Indeed, while the Australian government stubbornly holds to its fossil fuel philosophy, pushed on by a powerful mining lobby, international investors have already fled the scene. As this graph below shows, listed coal investments have been a disaster over the last few years.
The top graph shows the Bloomberg Coal Index, an average of 40 stocks, has slumped two thirds since 2011. The second graph shows how that same index has compared to the broader benchmark, the MSCI World Index. It highlights, perfectly, the disconnect between coal and the global economy. Divestment decisions by large pension funds are just a matter of common sense.
These developments make a mockery of the repeated assertions from Tony Abbott, Industry minister Ian Macfarlane, and even environment minister Greg Hunt, that Australia should seek to extract every tonne of coal, and every molecule of gas, all the while trying to kill the development of the renewable energy industry.
The recent RET Review was based on modelling that deliberately excluded a carbon price, financing risk, and community opposition as factors in pricing coal. As one of the world’s leading risk managers said earlier this year, such failures to factor in climate risk are “insane”. Goldman Sachs, among numerous others, is seeing a “transformational moment” for investment in renewables. The Abbott government does not.
As we reported on Wednesday, the coal industry is on a terminal decline, and Big Oil will soon follow. It is not just battling falling market prices, the higher costs of extraction, and the likelihood of tighter climate rules, it is also losing out to new technologies – wind and solar in particular.
As French broking firm Kepler Chevreux pointed out, $100 billion invested in either solar or wind energy will actually deliver more net energy to consumers than $100 billion invested in oil. And it will be cheaper. Within 10 years, Kepler Chevreux says, the global energy markets will be radically different.
Is Australia prepared for this? It was, but in the last 12 months – since the election of the Abbott government – all its policies have been thrown into reverse. Investment in renewables has come to a halt, all in the extraordinary fear that Australia might deliver 26 per cent of its electricity demand via hydro, wind and solar, rather than “at least” 20 per cent.
Greens leader Christine Milne, whose party has been ridiculed in the mainstream media for predicting exactly what has transpired in global energy markets, says Australia is likely to become a “rust-bucket economy” under the Abbott government.
“Tony Abbott is putting his hands over his ears and refusing to hear the loud message that investing in coal, and building coal ports and railways, will lead to stranded assets and is jeopardising our future prosperity,” Milne said ahead of a major speech on climate policy on Thursday.
“The simple truth is that Australia is being left behind, not by accident or negligence, but by design. Tony Abbott is clinging desperately to the old formula while the world changes around him. It is so clear that Australia’s greatest opportunities for jobs, investment and energy security are in solar and wind, especially as other countries steer away from dirty coal.”
She also said it was “an absolute disgrace” that Tony Abbott would not attend Ban Ki Moon’s climate summit in New York next week, despite being in the same city the very next day.
Meanwhile, Tim Buckley, director of Energy Finance Studies for the Institute for Energy Economics and Financial Analysis (IEEFA) says this latest announcement from China puts Australian export coal at serious risk.
“Claims made overnight by some industry lobby groups suggesting there is no impact are misleading and seem to be divorced from reality,” Buckley said. “The critical point is that the Eastern coastal areas of China (where the restrictions are most severe) are where global seaborne thermal coal imports including those from Australia compete. The western inland coal markets of China are not contestable.”
The fact that this could impact half of Australian thermal coal exports raises serious questions about the need for significant new water allocations and new capital expenditure to build coal preparation and washing plants to process the coal before export. And it raises yet more questions about the viability of the giant Galilee Basin coal projects that the Newman and Abbott governments are so keen to develop.
“Why is China pursuing this proposal? Clearly reducing air pollution is a key driver. We would also reference the growing expectation that a peak in China’s national thermal coal consumption is imminent,” Buckley said. IEEFA forecasts a peak in China’s thermal coal consumption by as early as 2016.