Analysts see a future for Australian coal miners, despite declining investment in new coal-fired power plants and a global climate change body’s report on the dire consequences of global warming.
If the warning issued by the United Nations’ Intergovernmental Panel on Climate Change (IPCC) is heeded, coal-fired power will need to all but meet its demise by 2050 to limit global warming to 1.5 degrees Celsius.
The report from the IPCC found a steep reduction in coal usage to 0 to 2 per cent of electricity will be required, while renewables will need to supply 70 to 85 per cent.
According to the International Energy Agency, decisions to invest in new coal-fired power plants to be built in coming years declined in 2017 for a second straight year, to a third of their 2010 level.
Tim Buckley from the Institute for Energy Economics and Financial Analysis (IEEFA) described it as a “run for the exit”, following decisions by major international corporations.
Japanese conglomerate Marubeni announced last month that it would no longer enter into any new coal-fired power generation business, and said it will sell or transfer some of its existing assets.
It was followed by a similar decision by multinational bank Standard Chartered, to cease providing financing for new coal-fired plants globally.
Resources analyst David Lennox told the ABC investment in new coal mines is also likely to dry up.
“With the outlook that we’re seeing, we can’t see any reason why anyone would be wanting to develop any significant and expensive thermal coal deposits,” he said.
Mr Lennox expects global population growth and rising energy needs to see continued growth in Australia’s thermal coal industry, but at a substantially slower pace.
“The rate of growth will not support significant new capital development into that market, but it will support those companies that have already got infrastructure and very large deposits,” he said.
“Those companies that have got thermal coal deposits, they will see growth over the next 20 years, but that growth is going to be constrained because commodities such as wind, solar and natural gas are invading their space.”
Australian miners may benefit in near-term
While there is a squeeze on new investment, some analysts expect existing Australian miners to benefit in the near-term.
“Those who survived the crunch period from 2007 through to mid-2015, 2016 have now done quite well out of the recovery that we’ve seen in the thermal coal price over the past couple of years,” Fat Prophets analyst Mr Lennox said.
UBS global commodity strategist Lachlan Shaw sees the shift in global energy markets as a “multi-decade transition path”, with any quick move away from coal “very, very challenging” given its current significance in the energy mix.
He said it is too early to tell whether the IPCC report will result in policy changes.
“If you were standing back and looking at the policy risks there in terms of the coal sector, if governments do agree to form a consensus to act, then you would anticipate that a multi-decade positive outlook for coal demand starts to get shortened, but it’s highly speculative at this point in terms of what that looks like,” he said.
“It’s the policy settings and the government approach to the coal-fired power sector in North Asia and South-East Asia that will, by and large, determine the long-term fate of the Australian coal sector.”
In the current environment, UBS expects Australian exporters to benefit from a growing preference for higher quality coal.
“Higher quality coal tends to have less sulphur, less nitrogen, which are linked with smog, and lower ash levels, which are linked with particulate pollution,” Mr Shaw said.
Whitehaven Coal spruiked its coal in a statement to the stock market following the release of the IPCC’s report on Tuesday.
“A key driver for growing demand in South-East Asia is the construction of High-Efficiency Low-Emission (HELE) power stations that use high quality, low ash, low sulphur coal, of the type produced by Whitehaven,” it said.
However, some long-term investors are not interested in any potential short-term boon.
Local Government Super made a decision in 2014 to divest from any company that derived more than a third of its revenue from coal or coal-fired power generation, resulting in the exclusion of 54 companies globally.
“It’s been a great investment decision, it’s made us money,” said LGS head of responsible investment Bill Hartnett, telling ABC’s The Business it added 0.1 per cent per year to the performance of its fund.
Mr Hartnett said LGS was not only considered the future of the coal industry itself, but also the effects of climate change on sectors including tourism and agriculture.
“We’re a long-term investor as a superannuation fund, we’re not just looking at investing in one industry, and particularly if that industry is not paying the full price for what it’s done, we’re concerned about all the economy and we think long-term,” he said.
Tim Buckley from the IEEFA added: “There is a future for the next decade or two, but it is worth bearing in mind that volumes peaked three or four years ago.”
The International Energy Agency’s central forecast accounts for global warming limited to 2.7 degrees Celsius, and on the IEEFA’s calculations, that scenario will see volumes of export coal decline 4.6 per cent by 2040, compared to 2016.
“If climate change is limited to 2 degrees, then the export coal market will decline by 59 per cent by 2040 — it’s going to half,” Mr Buckley said.
“Volumes are declining because there is just not the inherent demand and there’s not the willingness of miners and financial institutions to invest in new coal supply.”