The biggest loser: Bleak outlet for thermal coal

Yet another major analysis has painted a bleak outlook for the global thermal coal industry, warning of huge financial risks for investors in coal producers, and of a potential domino” effect” as China reaches a peak in coal demand as early as 2016.

The Carbon Tracker Initiative – an NGO established to track the evolution and danger of carbon investment bubbles – has released new research that highlights $112 billion of future coal mine expansion and development that is excess to requirements.

It also shows that new high cost mines are not economic at today’s prices and are not likely to make profits for their investors. Export projects are most at risk, particularly those that involve large amounts of spending on infrastructure.

That makes the findings of report particularly relevant for Australian investments, particularly around the Galilee Basin in Queensland, and also for the US, Indonesia and South Africa.

“With new measures to cap coal use and restrict imports of low quality coal in China, it appears the tide is turning against the coal exporters,” the report says, and it says the tide is going in favour of increased renewables, hydro, gas and nuclear.

“The world’ s coal industry is playing musical chairs with demand – every time the music stops another piece of the market is being taken away.” said James Leaton, research director at CTI.

“King Coal is becoming King Canute, as the industry struggles to turn back the tide of reducing demand, falling prices and lower earnings,” added, Anthony Hobley, the CEO of CTI.

The CTI report adds to the crescendo of analysis that is being produced – both by NGOs and by the mainstream finance community – about the dangers for thermal coal and particularly for investors in new projects.

Last week, 340 main pension funds managers with $26 trillion under management called for a carbon price and tougher global climate goals to ensure that investment was pushed away from coal towards clean energy.

Numerous reports have questioned the long-term future of thermal coal – from Goldmnan Sachs, Lazard, Alliance Bernstein, Citigroup, Deutsche Bank and HSBC. It is spreading to the oil industry too, with Kepler Chevreux last week noting that Big Oil is also in decline, and noting that $100 billion invested in either solar or wind energy will actually deliver more net energy to consumers than $100 billion invested in oil.

This is having an impact on equity prices – with coal stocks on average down more than two thirds in the last 3 years, despite a booming stock market, and makes it difficult to secure finance, with the risk costs soaring.

This has clearly unsettled the coal industry, which is making a pitch that coal is the only fuel source that can bring third world people out of poverty – clearly nonsense when the costs of new technologies are compared – and attacking the qualification of those such as CTI.

The Australian government – even environment minister Greg Hunt – has swallowed the coal industry’s argument on energy poverty – and the Murdoch media is happy playing lap-dog to the coal lobby.

Today, The Australian broke the embargo on the CTI report, and led its story quoting Australia’s main coal lobby group accusing the CTI researchers of being “activists” rather than analysts.

That’s a a bit rich coming from a lobby group, but it’s a furphy anyway. Two of the key authors of the research are Mark Fulton, an economist and market strategist at Deutsche, Citigroup, Salomon Bros and County NatWest, and Tim Buckley, a former head of research at Citigroup.

But back to the analysis.

This graph below best typifies the new capital expenditure at risk – the purple is what would remain justified under the forecasts and assumptions prepared by the CTI, the remainder is what would not reach that thresh-hold and could therefore be considered to be at risk.

The CTI report argues that coal’s future is bad because of a range of factors:

Demand assumptions are unravelling: Global demand for coal is falling due to a number of factors, including energy efficiency, decentralisation, and diversification. The costs of renewable technologies continue to drop at a pace faster than most have predicted, making renewable alternatives to coal already competitive, and some governments are introducing a range of pollution controls, such as the EPA in the US.

The carbon budget is nearly blown: The potential coal supply vastly exceeds a 2°C carbon budget, creating a huge carbon overhang. The scale of the reduction in coal use required to prevent dangerous levels of climate change should not be underestimated. Achieving these cuts will likely require some disruptive technologies to drive down the cost of renewables further and build out robust energy storage capabilities

Producers are chasing the same markets: What were previously segregated national and regional markets are becoming increasingly connected. OECD markets remain oversupplied, and the seaborne market, meaning coal producers are increasingly betting on new growth in Asian markets, even though the tide is turning in the biggest market.

The markets are sinking: Over the last three years, the Bloomberg Global Coal Equity Index has lost half of its value while broad market indices are up over 30 percent. In the pure coal sector there is only one trend – downward; coal prices are down, returns are down, share prices are down. Some analysts are already calling a structural decline in the seaborne thermal coal market.