The incredible shrinking coal industry

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Just a few years ago a long and glorious future was expected for coal, based on China’s insatiable demand for coal – our coal.

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A lot has changed in the last few years. Just a few years ago, with prices of both thermal and coking coal through the roof, it was cigars and caviar time for an industry who were proposing more new projects than you could point an activist at. A long and glorious future was expected, based on China’s insatiable demand for coal – our coal.

It didn’t quite work out that way. A slight drop in GDP growth in China saw coal piling up in import stockyards. Then, the recognition that China’s horrendous air pollution problem needed urgent action has seen all manner of restrictions and caps on future coal consumption. And all the while, that other world leader in carbon pollution – the United States – continued to close coal power stations as gas, renewable energy and efficiency plugged the gap.

To give a sense of just how much the situation has changed for the coal industry, we looked at the market capitalisation of ten of Australia’s biggest pure play coal producers. Here’s how their value has changed since the start of 2012:

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Collectively, these companies were worth $15 billion in January 2012 but as of September 2014 were a shadow of their former selves, losing over 60% of their collective worth to be now valued at $5.9 billion.

Even the big, diversified miners have struggled. While the ASX 200 has grown 40% since January 2012, both BHP and Rio have underperformed the market, only briefly poking their share prices into relatively positive territory.

Take a look:

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While this graph doesn’t in and of itself mean that coal is the cause of BHP and Rio’s failure to keep pace with the market, a look at what both companies are doing gives a sense that coal is the ball and chain dragging them down.

Rio’s Energy CEO Harry Kenyon-Slaney gave a rousing speech at the Australian British Chamber of Commerce in September 2014 where he reaffirmed coal’s central role in energy and wealth creation. But he forgot to tell the audience that Rio had just sold their Mozambique coal assets at a $3.95 billion loss, that they had also sold their Clermont mine in Queensland, sold 30% of their Mongolian coal mining project and put a 29% stake in Coal and Allied, their NSW partnership with Mitsubishi, up for sale.

BHP’s CEO Andrew MacKenzie has publicly defended the role of coal in the world’s energy mix for decades to come, but meanwhile is demerging its thermal coal and other non-core assets into “SpinCo”, having last year reassured BHP shareholders that there are no new major coal projects planned.

The decline in Australian coal companies is not unique. Go to China and the United States and you’ll see the same story, with share prices commonly down 50-70% over the past couple of years. Peabody – whose CEO in August boldly pronounced that “coal always wins out” and that fossil fuels “would be the dominant source of energy for the rest of our lifetimes and beyond” – were recently downgraded to a sell rating by Goldman Sachs on the back of a declining coal price, poor profit results and a rising debt profile.

In fact, this slide shows how Bloomberg’s coal index has dropped by two thirds since 2011 and this drop off a cliff is even more spectacular when compared to the MSCI Global Index, which has grown 50% over the same timeframe.

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So what does the future hold?

The main question for the industry and analysts is whether the decline seen over the last couple of years is cyclical or structural.

It’s pretty easy to tell which camp, Aurizon’s CEO Lance Hockridge, resides. Aurizon is a Queensland-based rail company whose core business is hauling coal. Aurizon has a deal on the table to join Indian conglomerate GVK in their venture to open up the Galilee coal basin. In a recent speech to the Australia-Israel Chamber of Commerce Mr Hockridge justified the deal, which would cost Aurizon about $3 billion, by claiming Chinese coal demand would grow 5% per year to 2020.

Though one wonders how committed to the faith Aurizon can be, when profit has halved due to asset impairments during the year of $317 million – a long list of coal infrastructure assets that have slinked out of financial feasibility… Dudgeon Point, Wiggins Island Stage 2, Surat Basin Rail Joint Venture and Abbot Point T4 have all left the stage.

Unfortunately for Mr Hockridge, recent changes in China’s coal imports and consumption means his 5% growth per year prediction probably looks more accurate with a minus sign ahead of it. Coal production has almost flatlined this year, and with 10 of 34 provinces having pledged to peak coal consumption by 2017, it is not hard to see which way the dust is blowing. The announcement of a ban from 2015 of coal with high ash and sulphur content means has Wood Mackenzie predicting a cut of Australian coal exports to China of 40%. Now there is talk of China re-introducing tariffs that would further chomp into the profit margins of exporters.

For the likes of Aurizon, this all amounts to a multi-billion dollar gamble on a massive new coal project, while the market seems to be pulling up stumps. You’ve got to admire their front!

Let’s face it. Coal is on the slide. Investment analysis predicting structural decline for the industry is piling up, including the likes of Bernstein Research, Deutsche Bank, Citigroup, Standard and Poor’s and Moody’s rating agencies all pointing to a bleak long-term future for coal.

Frankly, for anyone who wants to give the world a fighting chance of avoiding runaway climate change, this is a moment to rejoice. A peak in Chinese and global coal consumption has been on the wish list of campaigners for many years but felt so tragically out of reach. It now appears just around the corner. Now it’s a matter of how quickly the transition from a fossil fuel-based economy to one dominated by renewable energy can take place. It’s going to be a phase of the climate change debate like no other, and one where our political leaders, financial institutions and even ourselves face up to some tough questions.

Questions of political leaders who, in the absence of a vision for an economy beyond coal, offer nothing but false hope to workers over their futures. The reality is that people working in fossil fuels and their families face a tough future and are not being done any favours by politicians who are stuck in a “quarry vision” mentality of the economy. The work done in recent years by environment groups, unions and academic institutions on “just transitions”, promoting the development of new industries to serve the renewable energy powered economy – that work is going to be more important than ever.

Even harder questions will need to be asked of politicians winding back climate policy and steering the economy further and further off course from the global trend away from coal.

Shareholders will need to ask hard questions of companies who would risk their balance sheet and shareholder capital to new, speculative ventures in coal. And questions need to be asked of banks that lend to mines and ports on shaky moral, and economic, foundations.

And for ourselves, the most important question to ask is: is the transformation out of coal and into clean, renewable energy alternatives taking place quick enough to avoid passing a point of no return with global warming? For those of us wanting a safe climate future, the structural decline of coal is one of the most hopeful prospects to emerge in years. And if we’re going to finally get out of this polluting sector, we might as well do it properly.

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36 Comments
  1. Peter 5 years ago

    Hardly surprising! When the profits of such powerful established interests are threatened they aren’t going to give those interests up easily. They will trot out any old line, engage in personal attacks with little regard for the truth and continue to perpetrate myths.

    Meanwhile the mighty emperor is starting to lose his clothing! I look forward to the day when in fact the emperor has no clothes at all.

    • Marg1 5 years ago

      “I look forward to the day when in fact the emperor has no clothes at all.”
      And may it happen sooner rather than later!

      • wideEyedPupil 5 years ago

        Will happen sooner. One of the nice things about the divestment movement is that it has more leverage than any derivative stock. The more divestment takes hold in influential institutions the more it becomes a self fulflling profecy others will perceive the need to get out before the fossil market crashes, which ultimately will cause it to crash. And who is going to bail it out? Would even an Abbott govt bail it out and risk electoral suicide?

        • Honesto 5 years ago

          You appear to be confusing the price of the product (fossil fuel) with the price of the share in future income of the company extracting it. Any income generating asset (even a depreciating one) it has a Net Present Value. Now people will disagree on what that might be and hence you get a market in shares and other financial instruments. If the divestment movement triggers an excessive market reaction (ie: the price goes below the NPV) then traders merely buy it again until it rises to the NPV. The “market price” is always a matter of opinion. Oversell and someone will make a profit at the expense of those selling too low. Hence the point of the divestment movement is???

          • Alen T 5 years ago

            That’s simple, to make companies realise unethical processes (e.g. GHG emission to the atmosphere) are not acceptable anymore, the companies need to change their polluting models of operations, and most of all it demonstrates to certain politicians that it is not just ‘greenies’ or pure environmental groups that have an interest in ethical behaviour and curbing GW / mitigating CC.. They say money talks, well it’s doing quite a bit of yelling at the moment.

          • Jonathan Prendergast 5 years ago

            I’ve gone through this same dilemna, but I have come to the conclusions that divestment works in 3 ways:
            – Share price risk. Shares are valued by revenue and future revenues, but the price is what someone is prepared to pay for it. If there is a risk placed on a share that there will be a lack of demand to buy such shares in the future, that will be reflected now
            – Raising capital. Using fossil fuels is not just continuing to use existing assets. All the time new investments are being made, whether it be a new mine or upgrading a coal generator to keep it running. Raising capital is the riskiest part of finance, and if there is a lack of willing investors, this makes raising capital much harder
            – CEO’s are judged on their share price. It has immediate impact, and will effect change.

    • John McKeon 5 years ago

      … and we shall not be looking at his private parts, but rather enjoying the vengeance to be got from his embarrassment!

  2. Peter 5 years ago

    The Minerals Council is well versed at nastiness and being loose with the truth.
    Here is a write up of some of their tactics;
    http://www.smh.com.au/business/comment-and-analysis/minerals-council-should-try-fighting-back-with-facts-not-abuse-20140926-10mdr4.html

  3. Alan Baird 5 years ago

    Irritated, annoyed or quick to anger: whatever, it’s good to see the wealthy and their media sycophants erupting when things don’t accord with their game plan. It’s almost worth waxing lyrical about the wonders of nature just to watch their blood boil. Seneca was among the first to remark that the rich were the most irascible of people. He gave an example: a slave dropped a glass of wine at a soiree for the upper crust and was punished by the host by being thrown into a pool of lampreys, a thoroughly unpleasant end. So remember, when you say (or write) something that disrupts their world view, THAT’S what they’d REALLY like to do to you. They may disclaim it, but they would. They can’t help it. Every time you see a mouth-foaming headline in the Tele or the Hun or the Oz, they’re thinking, “lampreys”. And that’s why all shock-jocks are on the right. And it’s also why we enjoy irritating them immensely. We can’t help it either. Here endeth the lesson.

  4. Zvyozdochka 5 years ago

    Progressives have to bring the obsessive compulsive drive of the right-wing/business-as-usual-crowd to affect change.

    Currently we don’t do that. The righteous ‘force’ of our (correct) ideas isn’t enough.

    The divestment campaign is a good example of how to do it. We need more bodies on the ground however.

    • wideEyedPupil 5 years ago

      the divestment movement came out of the progressive climate movement. what are saying?

      and their model was the anti-apartheid movement inspired by Mandela and organised worldwide by progressives.

      • Zvyozdochka 5 years ago

        Having lived/worked in the US for a few years, I’ve seen how the ‘left’ are unable to respond like the RWNJs. They set the agenda which the ‘left’ finds itself constantly responding to, not discussing/acting out ‘left’ ideas.

        For example, the US anti-abortion movement is infected with noisy zealots that are slowly chipping away, getting what they want. That’s an extreme example but it is the sort of fanatic energy progressives will need to find to push back hard against the neo-liberal agenda.

  5. Chris Fraser 5 years ago

    ha – the peasants are revolting !

    • Megs 5 years ago

      yeaarrsss , Aren’t they !

    • Leigh Ryan 5 years ago

      Hang on i put solar on the roof and my so called subsidy was the selling of my carbon credits to the installer that he then onsold to polluting industries, so they didn’t have to change anything that they did, so where is the subsidy and how is the taxpayer funding that, ok so the carbon tax is gone now but the story is still that the taxpayer didn’t fund anything.

      • Peter Thomson 5 years ago

        The fossil energy producers didn’t have to change what they do, but every person like you that puts solar panels on their roof reduces their market for carbon-polluting energy. The death spiral is really starting to bite, and removing the carbon tax is starting to look like ‘too little too late’ to change it. Hence the recent moves in Queensland to push back against rooftop solar.

    • zazen 5 years ago

      oh yeah!!

      and from where it hurts the most – their hip pocket 🙂

  6. Blair Donaldson 5 years ago

    Maybe the numbers have been posted somewhere and I have missed it but I would like to see an updated comparison of those employed in mining versus those employed in renewables and how the comparisons have changed over the last five years. I think they might tell an interesting story. The dummy spit from the fossil fuel lobby is revealing and suggests they are finally waking up to the fact that their propaganda is losing steam.

  7. Pete 5 years ago

    The mindset we are up against is shown by this blogger for The Australian:

    http://www.theaustralian.com.au/opinion/ipcc-calculations-show-global-warming-wont-be-harmful-if-it-resumes/story-e6frg6zo-1227083037892

    Abel and Alvin are two voices of reason in the comments; the responses to them are just as scary, if not more so, than the original post!

  8. Tom Swann 5 years ago

    Fantastic piece Giles.

    My only gripe is your contention that states are dependant on royalties. All revenue (tax and royalties) from all mines in all of Australia are less than 5% of government revenue.

  9. News Views 5 years ago

    In all these discussion s nobody EVER says the RET is a Govt subsidy that you and I ultimately pay for it – and until the real cost is known and brought into the discussion we only see half the story.

    • Phil of Brisbane 5 years ago

      You need to think about the real cost of not acting on climate change, which we will all ultimately have to pay for in very big ways which will absolutely swamp any contribution we may be making for the RET. And of course another part of the story is the huge Government subsidies currently received by the fossil fuel industry – the media and the government NEVER talk about that!

    • Blair Donaldson 5 years ago

      You must be apoplectic then at the subsidies paid to fossil fuel fired generators?

    • JohnRD 5 years ago

      The RET is a scheme that forces the fossil power industry to divert some of the subsidies it gets from the government to the renewable power industry. The RET is not a scheme that gives government subsidies to renewable energy producers.
      The above is why the RET was able to quietly drive investment in renewables without having a noticeable difference on the price of power. (Well actually, it has been driving down the cost of power which is why the fossil power industry is getting so agitated.)

    • Petra Liverani 5 years ago

      Perhaps if we’d gone for emissions standards rather than carbon tax or RET we could have got there more easily. Emissions standards would close all the past end-of-life dirty coal-fired power stations leaving room for renewables, get EVs going and no doubt make other good things happen. How do you feel about emissions standards?

      • Alexander Dudley 5 years ago

        The coal industry would have fought tooth and nail on that, and the LNP would have caved in just as easily. A Carbon price is the fairest means of reducing CO2 emissions, and putting that money into renewables was working well.

      • Alen T 5 years ago

        The design of the carbon price was a textbook setup, fixed price in the beginning, free permits to start with, the revenue recycled to low-income households and clean energy project and of course the eventual transition to a floating price where the market determines the price but we control the total emissions, including linking it internationally to establish a global ETS. The blame is not on the design of the ETS or ‘carbon tax’ as it is incorrectly referred to, rather on FF lobby groups, Labor’s infighting and of course on Abbott’s (LNP) ignorance and general denial of science.
        Need to mention Murdoch of course, can’t just be a coincidence that the places he’s set up shop (Murdochland), are among the biggest and loudest deniers of aGW

        • Petra Liverani 5 years ago

          I didn’t really mean that emissions standards would be a better mechanism, I just wondered what News Views thought about them. But, I suppose, as Alexander Dudley says below, they would have been fought against just as hard.

          Actually, News Views, to use the word “subsidy” for renewables is slightly misleading. Subsidy tends to imply help to something that cannot sustain itself. The fossil fuel industry has been around for a long time and still needs subsidies whereas the renewable sector only needs establishment money – it’s new and the technology has not been in serious development for very long. Very quickly it will become self-sustaining and there will be no more so-called subsidy unlike fossil fuels which will need subsidies until we stop using them.

  10. Alen T 5 years ago

    Oh isn’t it nice to see them squirm, I hope UQ and QUT follow in the steps of UNSW and ANU soon, to see the two biggest Universities in QLD quit coal just as the biggest mine is proposed up in the Galilee will be a very nice touch indeed.

    • wideEyedPupil 5 years ago

      Of course sandstone Melbourne University who have largely gone missing in the climate change debate for the last two decades (David Karoly and MSSI notwithstanding) and who like to consider themselves world leaders in the world leadership stakes are resisting divestment with all the spurious arguments of a sandstone Uni. their board is not dissimilar to the board of a bank or a fossil fuel company and they are all feathering their own nests as priority número uno.

  11. Peter Thomson 5 years ago

    Jennifer Hewitt says, “The Minerals Council says it’s a bizarre concept of ethics given the
    importance of coal in delivering access to affordable electricity to
    hundreds of millions of people in the developing world.”

    Meanwhile developing countries question the ethics of a developed world that is damaging their environment by failing to do anything effective to mitigate climate change.

    Jennifer Hewitt says, “Fossil fuels will be a major part of the energy mix indefinitely.”

    But fossil fuel reserves are finite – they cannot last indefinitely.
    And long before they actually run out the energy return on energy invested (EROEI) falls to 1:1, when further extraction becomes pointless.
    But long before then, they will have passed the Hubbert peak, where supply can no longer meet demand, and fossil fuels stop being ‘affordable’ and start becoming really expensive.
    We need to have largely eliminated fossil fuels from our energy mix well before we reach that point, or we are all in so much trouble.

    And then there’s climate change. The best thing we can possibly do to minimise the effects of climate change on future generations is to stop emitting CO2 asap. So relying on or promoting the burning FF’s for *any* period into the future is causing harm to our children. Where are the ethics in that?

  12. Winston 5 years ago

    But Giles, we don’t read newspapers. So no problem. As time goes on, the Murdoch-Coal coalition will increasingly become a little walled garden full of ranting idiots that the rest of us quietly pity while we get on with making things better.

  13. john 5 years ago

    The problem when you have cognitive dissonance to do with the way we are going you will cling to your belief that your not messing up the nest for your descendants.
    This I feel is the real reason that people are so set in their ways.
    Any change means they have to change their belief system and that is very hard when you have a poor education.
    As to divestment.
    Any money manager will move the funds out of a dead industry after all how much is invested in steam technology?

  14. Jan Veselý 5 years ago

    Hard coal electricity in Germany is about 15% down from last year, lignite is 5% down. I wonder if any Murdoch media will cover this story.
    http://www.renewablesinternational.net/renewables-take-top-share-in-the-german-power-mix/150/407/82407/

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