Barely a day goes by without one or more coal lobbyists proclaiming thermal coal still has a rosy future.
However, just over two weeks ago executives from BHP Billiton told analysts from Macquarie Research that if the world followed through on its pledge to limit global warming to a 2°C temperature increase then thermal coal miners could be in big trouble.
BHP Billiton executives were keen to expound on their assessment of how the company would fare – whether the transition from fossil fuels is orderly or the result of a “shock event.”
Macquarie Research’s analysts were left in no doubt about the result. “Mirroring our base case, under BHP’s climate stress testing, they expect a massive drop in demand and earnings for thermal coal,” they wrote in an April 7 note titled “BHP Billiton: 2°C could make all the difference.”
Macquarie Research also flagged that under its long-term thermal coal forecast price of US$48 a tonne it valued BHP Billiton’s thermal assets at around just US$790 million. With low long-term prices Macquarie Research’s analysts think “only the NSW Energy Coal group” – which includes the massive Mt Arthur coal mine in the Hunter Valley – would generate positive earnings over the long-term. (BHP Billiton is also developing the mixed thermal/metallurgical Haju coal mine in Indonesia.)
Even though BHP Billiton noted a climate-constrained world would result in a fall in demand for most of the mineral commodities they produced, the analysts considered the company assessment could be on the upside. BHP Billiton’s claim that a moderate fall in demand for oil would have little impact on earnings, the analysts wrote, “seems optimistic.”
The analysts also had their doubts about the company’s claim that as steel companies sought to reduce emissions they would seek higher-quality iron ore and push prices up for the company’s product. “Though this is a possibility, it is not one we have seen yet in countries looking to cut emissions,” they wrote.
“We remain negative on our outlook for BHP and their commodity exposures,” the analysts bluntly wrote. BHP Billiton, in their assessment, would continue to underperform on the stock market.
The analysts also noted that if BHP Billiton’s assessment on the impact on the coal sector was right “then many other thermal coal producers” such as the Australian companies Whitehaven Coal and New Hope “could swiftly find themselves” with lower earnings too.
BHP Billiton’s belated and partial climate conversion
BHP Billiton has been a reluctant convert to the ranks of those advocating policy aimed at keeping temperature increase to two degrees above pre-industrial levels. Back in 2013 climate rarely rated a mention in public presentations of the CEO Andrew Mackenzie.
The late 2013 campaign by former Australian Coal Association Chairman Ian Dunlop for a seat on the board of directors was a massive wake-up call for the company. At first BHP Billiton dismissed Dunlop’s candidacy and climate advocacy but the accelerating decline of the coal market contributed to a rethink of its corporate strategy.
Where once coal was one of their “four pillars”, suddenly it was being sliced and diced with chunks offloaded. In April 2014 though they decided to offload the bulk of their thermal coal assets into the spin-off company South32, while continuing to hold onto its one-third share of the Cerrejon mine in Colombia and the massive Mt Arthur mine in the NSW Hunter Valley. (They held onto their metallurgical coal projects.)
By the time the 2014 AGM came around and Dunlop stood again, BHP Billiton was ready. They had revised their seven year-old climate policy and stepped up their climate-friendly rhetoric. They still opposed Dunlop’s board tilt but sought to soothe worried investors. However, the company’s chairman, Jac Nasser, grew fractious when pressed about the company’s continued investment in thermal coal.
As the late 2015 Paris climate conference neared, the growing isolation of the coal industry caused panic in BHP Billiton’s ranks. While the company sought to rally the coal industry troops to defend the industry at the Paris conference, it was all too little too late.
BHP Billiton entered into a multi-million dollar deal with SaskPower to hype Carbon Capture and Storage as a solution to burning coal and announced that it had a policy which supported keeping global warming to 2°C.
In September 2015 the company even released its Climate Change: Portfolio Analysis, a previously internal assessment of the impacts of climate policy on the company’s investments.
While data from BHP Billiton’s portfolio analysis is part of what was presented to Macquarie Research analysts it is already looking dated. For example, BHP Billiton’s assessment relied on data of thermal coal demand for 2014 even though the decline in the export coal trade which started in 2013 accelerated last year.
Nor does the company’s analysis acknowledge that its estimates of future coal demand from just a few years ago were hopelessly inaccurate.
If their current estimates of coal’s prospects are an inaccurate as their past ones, the thermal coal ship may well sink from under them before they can get off.