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The coal tide is turning

World Coal,

The Carbon Tracker Initiative (CTI) has released new research which identifies major financial risks for investors in coal producers, from the domino effect of slowing demand growth in China, where thermal coal demand could peak as early as 2016.

CTI’s analysis highlights US$ 112 billion of future coal mine expansion and development that is excess to requirements under lower demand forecasts. Specifically, it shows that high cost new mines are not economic at today’s prices and are unlikely to generate returns for investors in the future. Companies most exposed to low coal demand are those developing new projects, focused on the export market.

Measures to cap coal

With new measures to cap coal use and restrict imports of low quality coal in China, it appears the tide is turning against the coal exporters. The Institute of Economics and Financial Analysis (IEEFA)’s demand analysis shows how China’s coal demand could surprise by peaking in 2016 and then decline gradually thereafter, driven by efficiency measures, increased renewables, hydro, gas and nuclear and tougher policies to cut air pollution.

China’s desire to reduce imports will affect the seaborne market, impacting prices and asset values for export mines in the US, Australia, Indonesia and South Africa. The rapid displacement of coal in the US domestic market has seen US producers try and switch to exporting, however that opportunity is beginning to dwindle.

CO2 emissions

The implication is that Chinese carbon dioxide emissions may peak before 2020, given that these emissions have historically tracked coal demand so closely. Such a peaking would send a powerful message that all countries can target strong, cleaner economic growth, reduce poverty and manage their carbon emissions at the same time.

“The world’s coal industry is playing musical chairs with demand – every time the music stops another piece of the market is being taken away,” commented James Leaton, Research Director, CTI.

The European Union’s Energy Roadmap to 2050 and the US Environmental Protection Agency’s recent Clean Power Plan show that the construction of new coal plants will be severely constrained in Western markets. Meanwhile, the world’s biggest producer and consumer, China, has indicated a potential coal cap in its next five-year plan starting in 2016. India will have to overcome infrastructure and financial constraints if it wants to import greater volumes of coal. Coal producers around the world are relying on a flawed assumption of insatiable coal demand in China. The business model for coal looks on shaky ground without that demand.

King Coal?

“King Coal is becoming King Canute, as the industry struggles to turn back the tide of reducing demand, falling prices and lower earnings,” added Anthony Hobley, CEO, CTI.

CTI’s analysis shows that in a low demand scenario the seaborne coal market will account for an average of 850 million tpa over the next 20 years. Such a scenario will require production only up to a breakeven price of US$ 75/t. This means mines with costs higher than this will not provide investors with a decent level of return.*

“We see a low demand scenario leading to a US$ 75/t peak break-even price for profitable new development in seaborne markets – companies and investors need to understand their exposure to projects higher up the cost curve,” explained Mark Fulton, Founder of Energy Transition Advisors (ETA).

Low-demand scenarios

The CTI analysis shows that some of the world’s biggest greenfield coal projects in Australia’s Galilee Basin are already out of the money under a low-demand scenario. In the US, the potential expansion of mines in the Powder River Basin also has challenging economics. These areas require major investment in infrastructure to deliver production to the Pacific market, and new ports on the US West coast and adjacent to the Australian Great Barrier Reef have all faced opposition.

"The world is changing for the fossil fuel industry, especially the coal sector which is facing a shrinking demand window. Investors want assurances that capital is not being spent on high-cost, high-carbon projects that may not be competitive as global coal demand declines," concluded Mindy Lubber, President of Ceres.

* Australian Newcastle FOB export coal price was US$ 68/t at 1 August 2014.

Adapted from press release by Katie Woodward

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