Coal investments under threat as emerging economies go green

The price of thermal coal has plunged by a significant 51% since peaking in January 2011 thanks in part to a shift in Chinese and Indian attitudes to the use of fossil fuels.

Coal production represents approximately 4% of Australian GDP and the industry employs 50,000 people directly, according to Nathan Lim CFA Portfolio Manager Australian Ethical Investment

“India’s new Prime Minister Narendra Modi is very much pro-solar having strongly supported renewable energy when he was Chief Minister of Gujarat [in western India],” said Lim. “Calling for solar power to bring electricity to 400 million people is ambitious without equal.”

China has announced that it will ban coal-fired power from Beijing by 2020. Lim said, “Some market commentators have highlighted that coal consumption in China is so strong that this amounts to a token gesture. However he added: “Ordinary Chinese citizens are fed up with the pollution and coal is an obvious target for their frustrations.”

“Given that China is also experimenting with carbon pricing, are the world’s biggest producers of solar power (and a close second or third in wind) and have made pollution abatement a priority, we might be seeing the beginnings of a major structural shift in China’s generation mix.”

The winds of change will have major ramifications for Australia’s coal industry, and those firms exposed to the sector such as Washington H Soul Pattinson (ASX:SOL) and Energy Resources of Australia (ASX: ERA). Australia represents about 22% of Chinese coal imports at 42 million tonnes and second only to Indonesia, which supplies 66 million tonnes.

In recent years, Chinese imports from Australia have increased on average 9 million tonnes per annum underpinning the construction of the equivalent of two to three new mines. Lim has also calculated that coal’s contribution to the economy amounts to hundreds of millions of dollars per mine in construction work.

“A big pillar of our economy is at risk if we don’t have a response to falling coal demand and weak coal prices,” he added.