Why investors aren't walking away from coal

Contrary to media commentary, coal's demise is far from imminent. A report from Standard & Poor's suggests demand for coal will continue to grow in absolute terms, albeit at a lower rate.

Share analysts puzzling over why there should still be some positive investor attitude to coal companies might care to read a new review from Standard & Poor’s ratings service.

Looking at some of the media coverage of this commentary, I am struck by the strength of the herd instinct. It is fashionable with the inner-city left and their fellow travellers to declaim the imminent demise of coal; anything written about the demonised fuel must be seen through this lens.

Anyone taking a different view, it seems, must be a 'climate denier' and runs the risk of being derided.

Even S&P itself -- the report is written by its American staff -- is influenced by this meme. It has headlined its report ‘Carbon constraints cast a shadow over the future of the coal industry’, but the content tells a somewhat different story while addressing reasons for the shadow to be taken in to account.

Less than rigorous reading has led one media commentator abroad to open a review of the S&P report in this vein: “It looks increasingly like that ‘King Coal’ will lose its crown and a significant decline in coal production and consumption globally is becoming a much more realistic scenario.”

First, the current facts. While we have seen 13 years of massive propaganda and politicians’ rhetoric on carbon abatement and the need to shift away from coal, consumption of the fuel has in fact risen by 3.9 per cent a year between 2000 and 2013. It now stands at eight billion tonnes annually.

Second, seaborne trade in coal, the focus of much of the green drama, accounts for just 14 per cent of the total consumption. The top producers of coal are China (3.5 billion tonnes), America (one billion tonnes), India (600 million tonnes), us, Indonesia and Russia (400 Mt each), South Africa (300 Mt) and, believe it or not, those saintly promoters of wind and solar, the Germans (200 Mt).

Third, 87 per cent of coal consumed is used for power generation. There are 1,200 coal-fired power plants across the world (of which we have 27, some of them mothballed). 810 are in India and China.

Fourth, even as China closes old, inefficient local coal operations, it can be expected to ramp up imports to meet power demand.

Fifth, says S&P, any decline in Chinese coal demand will depend on the availability of viable alternatives such as large-scale gas developments or renewables. Without major investment in gas development, it adds, “we believe it unlikely that there will be a reduction in (China’s) use of coal over time or an ability to deal with its climate change challenges”. In the agency’s view, China’s need to meet higher demand for coal while replacing low-quality local product with imported fuel implies higher prices for seaborne coal in the medium term.

Sixth, even if coal consumption in China is capped, says S&P, “large deficits persist in key countries in (the rest of) Asia where pollution is either not top of the agenda or (even) an issue – and where electricity growth will encourage coal production growth.”

Seventh, while the analysts expect new environmental policies to emerge internationally, they believe “countries will find it hard to change their energy profiles materially over the next 5-to-10 years without compromising their economic competitiveness”. And, as a result, they expect “demand for coal to grow in absolute terms globally albeit at a lower-than-historical rate”.

Eighth, S&P believes that “under any scenario, coal will remain a key commodity worldwide, giving (supply) companies time to adjust to evolving market conditions as changes in (national) energy mixes lay out”.

None of this takes away the fact, as S&P notes, that coal has a big environmental footprint, given it provides 30 per cent of the world’s primary energy, fuelling 40 per cent of global electricity production and 68 per cent of steel production. But it does throw cold water over those who see its activities falling in a heap before you can say ‘Christiana Figueres’.

And, by the way, S&P notes en passant that, should there be a sudden (and surprising) decision by global politicians to embrace a whole new order of carbon management in Paris in December next year, stranding coal assets, the countries where miners will have a big problem will be Russia, America, China, Germany and Indonesia. This because they have up to 60 per cent of the world’s sub-bituminous and lignite coal.

In this, as in all else, the capacity to appreciate context – rather than to rely on sound bites, thought bubbles and wishful thinking – is more than a little useful. 

Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of Powering Australia yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.

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