An article from Mason Stevens on unintended outcomes of coal production and cost. IMO, as coal becomes more expensive, the transition to alternative energy sources will accelerate, same scenario will play out for oil I suspect.
The world's war on coal is making its biggest producers a lot richer, at least for now. Anglo American, Glencore and BHP Billiton are generating the highest profits in years from their coal mines. Income for the 37 coal producers tracked in a Bloomberg Intelligence index is the highest in six years.
As the Bloomberg article points out, it all comes down to supply and demand. With governments from Asia to Europe setting stricter pollution limits, output of the planet's dirtiest fuel is dropping. Some of the more significant declines are occurring in China, the world's biggest producer and consumer of coal, and financing for new coal mines is drying up. That's creating windfall profits for the producers who remain (see first chart). It's one of the unintended consequences of policies designed to combat climate change.
Source: Bloomberg (N.B. BHP profits are for financial years ended 30 June)
Anglo American, which not long ago wanted to offload its coal assets, has seen income from the business triple since 2015 to become the mining company's most profitable commodity. Last year, Glencore reported earnings from coal more than doubled, while BHP Billiton said it surged sixfold.
While global coal use and mine output has been dropping, production failed to keep pace with demand in 2016 for the first time in seven years, according to data compiled by BP Plc. As supplies continue to drop, the amount available for export is shrinking. BMO Capital Markets says the 1 billion metric ton seaborne market will have a small deficit by 2021 and expand to 15 million tons in 2022 (see chart below).
Concern over tightening supplies has revived prices. The price of European coal for export has almost doubled from the lows of 2016, and US futures are 50% higher on average in 2018 than two years earlier.
Source: BMO Capital Markets
One reason for the slide in output is the lack of financing for the coal industry. With growing concern about climate change, lenders shrank funding for the industry to US$14.9 billion last year from US$22.5 billion in 2015, according to BankTrack. At least 15 of the biggest banks have policies that prevent investing in coal projects. JPMorgan Chase, HSBC Holdings and Credit Suisse won't fund new mines, while Societe Generale and Deutsche Bank go even further with bans on loans for coal-fired power plants.
Big investors are increasingly turning their back on coal as well. So far, more than 850 institutions have committed to quitting coal investments. Norway's US$1 trillion sovereign wealth fund, the world's largest equity investor, sold off most of its coal stocks. California's lawmakers required the state's pension funds to divest any coal holdings. Several asset managers, including Allianz and Swiss Re, have similar policies, as do ESG funds. Even if funds can be sourced, the coal industry faces a rising cost of capital.
Australia's US$2.3 billion Carmichael coal venture is a case in point. Coal prices are the highest in six years, and the Australian government was so eager to get production started that it overruled concerns the project could damage the Great Barrier Reef. Despite that support, developer Adani Enterprises is struggling to get funding and has abandoned a 2020 target date to begin mining. It's already been rejected by three Chinese banks and lenders including Goldman Sachs and Investec.
Even big mining companies with deep enough pockets to build projects without bank support aren't interested in adding to coal supplies. BHP Billiton, for example, has said the world needs to combat climate change by reducing harmful emissions. Anglo American says burning coal will increasingly be contested by governments and consumers, and that use of the fuel will ultimately decline.
Anglo American cut production by 20% in the past five years and won't spend any more money on its existing mines. BHP, which mostly mines coking coal used to make steel, plans to run its thermal coal mines for cash, while it focuses on commodities like oil and copper. Rio Tinto sold all of its coal mines. Glencore, the top seller on international markets, is the only major producer committed to the fuel. It is buying mines from rivals, but the company says it won't build new ones.
While declining supply should support profits for those still mining coal, the industry remains at risk. Most thermal coal mined each year is used by domestic power plants, leaving less than a fifth of output available for the export market, which is dominated by China. China burns five times as much coal as the US, and it both mines and imports more than anyone else. China relies on overseas purchases to make up for domestic supply shortfalls. That poses a risk for companies such as Glencore and Anglo, because even a small drop in Chinese consumption could have a disproportionate impact on international demand.
In 2016, prices for thermal coal more than doubled after China curbed production (see chart below). Desperate to address a chronic air pollution problem by reducing industrial emissions, China has continued to mandate further cuts. In March, it pledged to shrink coal output by 150 million tons this year and steel capacity by 30 million tons. Imports of coal may drop in 2018 for the first time in three years, according to Bloomberg Intelligence.
Ultimately, higher prices for coal could accelerate the shift toward cleaner fuels. Already, competition has increased from power stations running on natural gas, wind turbines and solar panels, all of which are getting cheaper to build and operate. That's eroding the economic argument for continuing to burn a fuel with such high emissions, even in developing countries. Toxic levels of pollution lead to the early death of an estimated 7 million people a year, according to the World Health Organization.
Providing energy to people who otherwise don't have access to it is hugely important, but coal is not the best or even the most economic form of energy to provide. In Lazard's latest annual analysis of levelized energy costs - essentially the prices at which new projects will be able to generate electricity - the highest-cost solar and wind projects are now coming in below or equal to the lowest-cost coal generators.
The writing is still on the wall for thermal coal producers longer term, but there is money to be made in the short term due to those unintended consequences.
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