Is coal the new tobacco?

Tobacco remains a powerful industry offshore but for Australians it simply vanished as an investment option… coal could go the same way.

Summary: Coal is the simplest way to generate heat, so it remains the “go to” fuel for electricity generation even as cleaner technologies are being developed. In China, rapid growth has driven power demand and brought such high levels of pollution that coal use is being discouraged. But in India, which is starting to grow quickly, coal is seen as a critical fuel and there is increasing demand for Australian coal.

Key take-out: For investors, the situation is somewhat similar to the choice they once faced about whether to own tobacco companies, which disappeared from the stock market over time. The number of pure coal stocks on the Australian market is also declining, but the tonnage of coal mined continues to rise.

Key beneficiaries: General investors. Category: Coal.

Coal might be losing its appeal as an investment but that does not mean demand for coal is declining.

That contradiction can be explained by the competing forces which are hitting the profits of coalmining companies even as the world burns record tonnages. (To read more about the headwinds for coal companies, see Elizabeth Redman's article today: Will you be the last one out of coal?)

In a way, coal has become its own worst enemy because it is the simplest and easiest way to generate heat and that means it remains the “go to” fuel for electricity generation even as cleaner and more socially responsible technologies, such as wind and solar, are being developed.

Attempts to price coal out of the electricity market through higher taxes might eventually work in countries which can afford to pay more for their power but that will not be the case in poorer countries where demand for coal is growing rapidly.

To see the moral debate around coal clearly you only have to consider the differing views of the Chinese and Indian governments.

In China, rapid economic growth has driven power demand and brought with it such high levels of pollution that coal use is being discouraged and coal-fired power stations relegated to less heavily populated regions.

In India, which is starting to grow quickly and where the government is keen to match Chinese growth rates, coal is seen as a critical fuel with opponents of its use, such as environmental protection groups, actually becoming the target of government attacks.

Australia is at the centre of this situation because while pressure mounts locally to limit coal exports, and growth in Chinese demand has slowed, there is increasing demand for Australian coal in India.

For investors this is creating a moral dilemma which is somewhat similar to the choice they once faced about whether to own shares in tobacco companies at a time when smoking was being recognised as a national health hazard – but tobacco stocks paid handsome dividends.

Over time tobacco companies disappeared from the stock market, a process being repeated as the number of pure coal stocks declines on the Australian market – while the tonnage of coal mined and exported continues to rise.

Within a few years the moral dilemma over investing in coal companies will disappear because the industry will be controlled by foreign companies, or reside as a division within a diversified mining group, such as Rio Tinto or BHP Billiton.

But, whatever happens in Australia as the coal debate heats up there will not be a decline in overall coal consumption because it is readily available and is the world’s cheapest option to provide electricity for heating and lighting homes and powering industrial development.

Australian investors might quit their coal stocks but the world is not quitting coal.

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