In yet another sign that the global coal market is in terminal decline, the federal government’s mid-year economic and fiscal outlook (MYEFO) has predicted that thermal coal prices will flat-line through to mid-2016 at $US63 per tonne – well below current market expectations.
The gloomy Treasury forecast for coal reinforces multiple analyst warnings that Australia risks being saddled with billions of dollars in stranded fossil fuel assets, as prices fall, climate restraints kick in and fossil fuel projects become uneconomic and/or unsustainable.
Last week, UK Energy Secretary Ed Davey warned that fossil fuel companies could become “the sub-prime assets of the future… Investing in new coal mines is going to get very risky”.
According to the Institute for Energy Economics and Financial Analysis (IEEFA), the MYEFO coal forecast is further evidence that Australian governments – both state and federal – should exercise extreme caution on any plans to commit taxpayer funds to building infrastructure to open up the Galilee Coal Basin in Queensland.
As it is, Indian conglomerate Adani Resources – which in 2012 announced plans to proceed with a $10 billion development of the massive and as-yet untapped Carmichael coal deposit, including large-scale rail and port infrastructure investment, that would export coal to India from 2016 – still needs to raise around $4 billion for the project to proceed.
It’s a task that’s looking increasingly difficult, considering nine global banking giants including Citigroup, Goldman Sachs, and JPMorgan Chase have confirmed they will not finance the proposed connected coal export terminal at Abbot Point, due to the associated financial risks.
“We have long argued that once the $A10-14 billion of capital costs are taken into account, the Galilee coal projects are commercially unviable given the structural decline of thermal coal. It now seems the Australian Treasury agrees with us,” said Tim Buckley, director of Energy Finance Studies Australasia at IEEFA, who wrote here in May that Indian electricity prices would need to double to accommodate coal from the Galilee Basin.
“This is yet further strong evidence of the increased risk of stranded assets,” he said on Monday.
In an article published on RE in May, Buckley said Indian electricity prices would need to double to for generators burning Australian coal from the Galilee Basin to do so profitably.
The MYEFO coal forecast also follows the release of new research on Monday arguing that Australia risks systemic economic crisis unless it stops relying on fossil fuel exports.
The research, by Beyond Zero Emissions, finds that the Australian economy is showing signs of susceptibility to a systemic crisis, in a global environment characterised by lower than expected economic growth levels, and increasing implementation of restrictive climate policies.
The BZE report warns that, with international trading partners like India and China signalling there will be a significant drop in their demand for Australian coal (a key part of Treasury’s MYEFO forecast is that China’s real economic growth would continue to slow to a more sustainable 6.75% in 2015 before slowing further to 6.5% by 2016), Australia’s continued dependence on fossil fuels poses a significant systemic risk.
“Investment in alternative industries and infrastructure take time before they result in significant emission reductions,” says the report, written by Gerard Drew.
“Delaying investment towards a zero emission transition prolongs uncertainty, increases the potential for stranded assets, and increases the burden for future generations. Early action to reduce emissions will reduce the likelihood of a crisis to a low level.’
But a new report from the International Energy Agency has a slightly conflicting view to BZE, predicting global demand for coal over the next five years will continue to grow – albeit at a much diminished rate – breaking the 9 billion tonne level by 2019.
In its annual Medium-Term Coal Market Report, also released on Monday, the IEA notes that despite China’s efforts to moderate its coal consumption, it will still account for three-fifths of demand growth during the outlook period, and will be joined by India and other countries in Asia as engines of growth in coal consumption, offsetting declines in Europe and the United States.
“We have heard many pledges and policies aimed at mitigating climate change, but over the next five years they will mostly fail to arrest the growth in coal demand,” IEA executive director Maria van der Hoeven said at the launch of the book.
And while this outlook might look like vindication for governments like Australia’s, who have invested so much in the continued prosperity of coal markets and the importance of coal “for humanity”, it is most certainly not that.
“Although the contribution that coal makes to energy security and access to energy is undeniable,” van der Hoeven says in the report’s executive summary, “I must emphasise once again that coal use in its current form is simply unsustainable.”
By “unsustainable”, van der Hoeven is referring to the IEA’s recently stated warning the world’s fossil fuel consumption in the coming decades was leading to an average global warming of 3.6°C – well above the agreed 2°C limit beyond which the effects of climate change have been deemed to become dangerous – thus making catastrophic sea level rise, polar ice cap loss, water shortages and other severe climate effects nearly inevitable.
The IEA also warned that reducing fossil fuels to about 75 per cent from about 82 per cent of all global energy sources wouldn’t be enough to avoid exceeding 2°C of global warming.
The IEA’s latest report finds that global coal demand growth has been slowing in recent years, and it sees that trend continuing.
Coal demand will grow at an average rate of 2.1% per year through 2019, the report said. This compares to the 2013 report’s forecast of 2.3% for the five years through 2018 and the actual growth rate of 3.3% per year between 2010 and 2013.
“As has been the case for more than a decade, the fate of the global coal market will be determined by China,” adds the report.
As the IEA notes, the world’s biggest coal user, producer and importer has embarked on a campaign to diversify its energy supply – described as “the so-called ABC (anything but coal) policy – that will result in an increase in gas, nuclear and renewables generation that “will be staggering.”
However, the IEA report predicts that despite these efforts, and under normal macroeconomic circumstances, Chinese coal consumption will not peak during the five-year outlook period.
But it follows that prediction with this disclaimer:
“The report’s forecasts come with considerable uncertainties, especially regarding the prospect of new policies affecting coal. Authorities in China as well as in key markets like Indonesia, Korea, Germany and India, have announced policy changes that could sharply affect coal market fundamentals.
The possibility of these policy changes becoming reality is compounding uncertainty resulting from the current economic climate. The issue of low prices remains a hot topic among coal market participants. Last year’s report emphasised that many coal producers were running at losses, largely driven by take-or-pay infrastructure contracts or financial liabilities.”