Just before Christmas, leading Citigroup analyst Elaine Prior took Australia’s coal freight giant Aurizon to task over the lack of board engagement on the science of climate change.
The board, which is considering taking the lead role in a $6 billion investment in an upgrade of the Abott Point coal port and a new rail line to the massive coal mines in the Galilee Basin, did not have climate change on the radar.
In fact, Prior observed, there was no strategic assessment of climate at senior management and board level, and it barely rated a mention in the sustainability report. Little wonder, then, that there had been no apparent investigation as to whether the massive investment may end up as a stranded asset.
Prior’s assessment gained no headlines, had no visible impact on the Aurizon share price, and may not have even been noticed by the Aurizon board.
But in the light of the Great Barrier Reef Marine Park Authority’s approval to dump 3 million tonnes of sediment from the Abott Point expansion project into the marine park, and the determination of the Abbott federal government and the Newman state government to develop the Galilee Basin deposits – partly owned by the likes of Gina Rinhart, Clive Palmer and others, the only thing that could stop the projects is the lack of finance and support in the investment community.
If, as green groups have assessed, the Galilee Basin resources are one of a number of global “carbon bombs” that , then it seems the only people likely to save the planet are bankers. Given their track-record in sub-prime and other disaster, it may not be a comforting thought.
But, at least, banks and financial analysts are starting to take on board issues that many corporates, and Australian state and federal governments, refuse to countenance, or may even consider to be “UnAustralian”. The science of climate change is chief among them.
Little wonder that green NGOs are now taking their arguments direct to banks and the investment community, reasoning that unlike politicians, banks and investors should at least have a longer term perspective, and more skin in the game in the form of potential lost capital.
Prior, a former top rating analyst of oil and gas and still one of the country’ best regarded analysts, is not alone in raising concerns about coal. HSBC economists last month wrote that the issue of stranded asset valuations for coal has become “increasingly topical for equity investors and management” over the past 18 months.
“It is fair to say that the long-run future of coal is now “in play” in commodity and equity research markets.,” the HSBC economists wrote. Not that the miners accept this, because they have a massive “blind spot” over short term profits. But the fact that there is a debate in investment circles is a change in itself over the past 18 months.
“We believe that mining companies need to be able to demonstrate to investors how their portfolio would prosper in a low-carbon scenario – and how this is being factored into long-term capex,” HSBC writes. That is particularly true of infrastructure investors such as Aurizon.
Deustche Bank and Goldman Sachs have raised questions about the future of thermal coal, and even the IEA has said the current low coal prices “raise concerns about the economic feasibility of projects in the Galilee Basin,” and several pieces of specific analysis have queried the financial standing of some of the key players in the Galilee Basin
Analysts says there are several reasons why Aurizon’s $3 billion investment (its 51 per cent share) into rail and port infrastructure might not be a good long term investment. The first is China’s moves to combat its shocking air pollution. There is increasing talk that China will implement the cap on coal consumption that has been freely discussed among its main policy bodies.
The second is that the world may take decisive action on climate change, and actually try to do what it said it would – seek to limit global warming to 2C. That would require, according to International Energy Agency, the imposition of a strict “carbon budget” and the world leaving two thirds of its fossil fuels in the ground. There would simply be no long term market for Galilee Basin coal under that scenario.
The third is the most intriguing, because it is based around simple economics rather than government policy. It is generally assumed that India will continue to import huge amounts of coal no matter what to fire its electricity. But Prior notes that falling costs in renewables particularly solar, means that coal may not be able to compete over the medium to long term.
These may not be crucial for miners, who are keen to dig up as much of the wealth that currently lies in the ground. But for companies such as Aurizon, the infrastructure would require a 20-year payback period, and may not even be constructed for another 5 years.
Has Aurizon considered any of these options? Apparently not. Prior put some questions to Aurizon and the company told her that it sees strong 20-year fundamentals for coal, and it does not believe a 2°C global warming scenario represents a material risk.
Prior has a different view: “We see a risk that if the project starts 5-10 years into the future, and the world does take action on climate change or other dynamics drive a shift away from coal, driving weaker coal prices, a major long-term investment in the Galilee Basin might leave Aurizon’s shareholders with a “stranded asset”.