US coal market in ‘structural decline’, warning to global investors

Just a few days after China’s largest coal producer warned of 10 per cent decline in domestic coal sales in 2015, a new report has emerged from the UK warning that the US market for thermal coal is in structural decline.

The report, published on Tuesday by the London-based Carbon Tracker Initiative, paints a bleak picture of a coal market that has been pounded by cheaper renewables, energy efficiency measures, rising construction costs, a rash of legal and climate challenges, and the shale gas revolution.

“Cheap gas has knocked coal off its feet, and the need to improve air quality and ever-lower renewables costs has kept coal down for the count,” said Carbon Tracker’s senior researcher, Luke Sussams, who co-authored the report.

According to Mark Fulton, a research advisor to Carbon Tracker and former head of climate research at Deutsche Bank, the accompanying collapse in the share prices of the US coal sector (2011-14) offers an illustration of how markets can “punish investors in a climate-constrained world where lower carbon technology is developing rapidly.”

As the Carbon Tracker report notes, at least two dozen US coal companies succumbed to bankruptcy in the last three years, including major producers like James River Coal and Patriot Coal Corporation; many others lost 80 per cent of their share value in the same period, including coal colossus, Peabody Energy Corp.

Perhaps most interestingly, though, the report – entitled The U.S. Coal Crash – Evidence for structural change – shows how one of the biggest and most advanced economies in the world can decouple growth from such a well-established and dominant industry in a short space of time – even without a global climate deal, or federal carbon price.

The risk for passive investment funds, including some of the bigger pension funds, is particularly acute, says Carbon Tracker, given they track the indices and would have followed Peabody’s share drop regardless, until it fell out of the S&P 500 Index in September.

But Carbon Tracker says its findings on the grim state of the US coal market should serve as a warning to investors in other fossil fuel markets worldwide, who fail to read the structural shift away from hydrocarbons and continue to invest in assets likely to become stranded.

“The roof has fallen in on US coal, and alarm bells should be ringing for investors in related sectors around the world,” said Andrew Grant, Carbon Tracker’s financial analyst and report co-author.

“These first tremors are amongst the clearest signs yet of a seismic shift in energy markets, as high carbon fuels are set to be increasingly outperformed by lower carbon alternatives.

The report also notes that the US industry’s plan B – which, much like Australia’s is to export production to assumed perennial growth markets in Asia – has also floundered amid a global market awash with supply from other countries and weak demand.

“This pattern is spreading across the globe, and poses an existential threat to the business models of companies focused on coal,” Carbon Tracker said.