An August-time snapshot of the FTSE 100 showed that the three worst performing stocks of the moment – at about 2pm – were Glencore (-8.55 percent), Anglo American (-7.81 percent) and BHP Billiton (-7.25 percent). The day was Black Monday, and the conclusion: coal’s status as a hot stock was no more. Faced with rising energy efficiency measures, spiralling construction costs and mounting hostility, has the reign of ‘king coal’ come to an end?
The most plentiful and readily available of the fossil fuel family, the first coming of coal laid the foundations for railways, shipping and much of that which characterised the Industrial Revolution and, later, globalisation. By most accounts, the lifeblood on which economic superpowers were built, and soon after on which emerging markets fuelled their expansion; the black stuff is suffering, and could soon face the prospect of a terminal decline.
“The coal industry is desperately looking for positives, but most appear to come from their own PR campaigns claiming that coal is the solution to energy poverty or that coal is amazing,” according to James Leaton, Head of Research at Carbon Tracker. “Coal has had over a century to solve energy access issues, but basic geography works against it now – rural off-grid areas in India and Africa are home to most of those without energy access. The cost of a new grid, coal transport infrastructure and new coal plants is not competitive with more appropriate renewable minigrid/off-grid solutions. US coal mining stocks have already lost the majority of their value and are filing for bankruptcy protection – so they have already taken a big hit.”
Dealt a killer blow in the form of government regulation, West Virginia’s barebones coal economy is barely drawing breath
Looking at the past five years, 26 coal companies have fallen prey to bankruptcy, and US coal equities for the period are down over 76 percent, according to Carbon Tracker. International Energy Agency (IEA) predictions show that demand for coal will grow at a 0.5 percent yearly average until 2040, considerably less than the 2.5 percent average for the past three decades, and buyers will shed their dependency on coal in favour of cheaper, cleaner alternatives.
Looking at the situation in America, West Virginia more than any other state paints a frightening picture of coal’s diminished place in modern industrialised society. The ‘Heart of the Billion Dollar Coal Field’ is but a shadow of its former self (see Fig 1 and 2). One recent report, authored by West Virginia University (WVU) and entitled Coal Production in West Virginia 2015-2035, reveals that coal mine output has fallen in each successive year since 2008. Once-thriving mining communities are awash with unemployment, and the facilities themselves are monuments to better days. Decimated by a lethal concoction of slumping exports, reduced domestic use, changed compliance standards and challenging geologic conditions, the frontier state turned industrial boomtown is teetering on a knife edge.
Going by the WVU report, statewide coal production is set to suffer a 39 percent decline in the period through 2015-35, driven by the aforementioned factors. Worse is that approximately 5,000 miners have lost their jobs in each of the last three years, and large subsections of the workforce are waking up to the realisation that experience in the pits pays for very little these days. Chopped down by market forces in the first instance and dealt a killer blow in the form of government regulation, West Virginia’s barebones coal economy is barely drawing breath.
By most accounts the worst hit of the 50 states, West Virginia is by no means the only one to suffer as a result of coal’s decline, and 2015 on the whole has been a deeply unsettling year for US coal. Plagued by a rash of bankruptcies and worsening fundamentals, Alpha Natural Resources was the latest coal company to file for bankruptcy this August, and an SNL Energy report published soon after found that 10.4 percent of all US coal produced in the second quarter stemmed from those that have filed for bankruptcy protection. Bloomberg Intelligence figures, meanwhile, show that coal production is at its lowest rate in 29 years, and the number of operational mines has fallen 39 percent in the last 10, down to a level unmatched since the late-19th century.
Going back to April, coal reached yet another milestone low when its share of US electricity generation slipped to 30 percent, down from 50 percent, and natural gas suddenly became the country’s go-to source of electricity. “The roof has fallen in on US coal, and alarm bells should be ringing for investors in related sectors around the world,” said Andrew Grant, Carbon Tracker’s Financial Analyst and co-author of The US Coal Crash. “These first tremors are among the clearest signs yet of a seismic shift in energy markets, as high-carbon fuels are set to be increasingly outperformed by lower-carbon alternatives.”
Where mining centres such as West Virginia were once rife with well-paid workers willing to do away with their cash in an instant, the opportunities for nearby businesses have dried up, and for Big Coal, the consequences are enough to unsettle investors. Stock in Peabody Energy, still the world’s largest private-sector coal company, was four years ago trading at around $70 apiece, yet its value in today’s market is barely above $2 on a good day, trounced by a shift to cheaper alternatives and new regulations both.
With the price of US shale gas down over 80 percent since 2008, renewables gaining in stature, and regulation eating into coal’s competitive advantage, the outlook is bleak for an American industry that has in years past launched an industrial revolution and lifted millions out of poverty. For the immediate term at least, the question of whether or not US coal is in terminal decline will rage on, yet the future of coal is by no means tied to that of America’s energy whims: there are factors at hand here that go far beyond US soil.
“It does appear that coal is undergoing a long-term structural decline, especially in the US, but also around the world,” said Dan Bakal, Director of Electric Power at Ceres. “The cost of extraction generally continues to increase at the same time that society is forcing coal’s emissions to be addressed and competition from renewable energy and natural gas increase. This combination of factors makes coal largely uncompetitive, which explains the drop in share value, bankruptcies and cancellations of new coal production plans.”
As the world’s largest producer and consumer of coal, China boasts an output almost the size of the rest of the world combined (see Fig 3), and any bad news for it is bad news for the industry overall. Looking at the first 10 years of the 21st century, China’s coal demand growth averaged at nine percent a year, more than twice that of the four percent global average and a great deal more than that of the US. This is the resource on which China’s economic engine was fuelled, although a reliance on the black stuff is not without consequence.
Of course, there were other contributing factors, but the simple truth is that China’s coal drive was at fault for the country’s declaration of a ‘war on pollution’. Fearful that it could cloud the skies further and contribute to millions more fatalities, the ruling administration has introduced countless measures to wean the country off of it. A rash of cutbacks and closures have even led some analysts to conclude that the country will reach ‘peak coal’ far sooner than originally forecast: whereas previous estimates ranged anywhere in the 2022 to 2027 bracket, the latest is that coal use will peak within five years.
“With data from China indicating a peak in Chinese coal use and improved efficiency of use, this could mean China disappears as a significant coal importer, and could even become a major exporter, weakening the market further,” according to Leaton.
Last year brought the curtains down on a long-running trend, when coal consumption suffered its first annual decline in 14 years. The alarm bells were triggered first when the China Coal Industry Association signalled that production was down 2.5 percent in 2014, and official data later showed that consumption had fallen eight percent in the first four months of the year, resulting in an emissions reduction equivalent to that of the UK’s total emissions over the same period. Positive for the country in that it marked the start of a clean up for China’s haze-ridden streets, the news was nothing short of a disaster for miners working under the assumption that demand had some way to go yet before reaching an inflection point.
The passage of the country’s new Energy Development Strategic Action Plan (2014-2020) late last year was key, in that policymakers in this instance imposed a cap on consumption (4.2 gigatons by 2020) and pledged to reduce coal’s share of the national energy mix to 62 percent. A national emissions trading scheme – due to start in 2017 – will likely inflict greater pressures on polluters to clamp down on ageing facilities. Intent on tackling smog and environmental pollution, coal has taken the brunt of the government offensive so far, and the spread of like-minded initiatives could prove the final nail in the coffin for coal.
“Renewables and unconventional fossil fuels will take a larger share, along with gas, which is set to be the fastest-growing fossil fuel, as well as the cleanest, meeting as much of the increase in demand as coal and oil combined,” wrote Bob Dudley, CEO of BP in a report entitled BP Energy Outlook 2035. “Meanwhile, coal is now expected to be the slowest-growing fuel, as industrialisation in emerging Asian economies slows and environmental policies around the globe tighten.”
No matter, China’s fallout with coal was always likely to come at a price, nowhere more so than in the US, where miners have ramped up production without a thought for how the market might play out once the boom times fade. What we’re seeing now is a response to China’s change of heart, manifested in the shape of a supply glut and a dearth of replacement buyers. Speaking on the transition to a low carbon economy, a recent Citi report entitled Energy Darwinism II stated that coal could suffer a steeper decline in the coming years, with “current market conditions likely to persist”.
Back to black
Make no mistake, the financial hurt for miners is real and the job losses are piling up fast. And yet, the risks as far as slumping demand is concerned are often inflated. While it’s true the industry is suffering its worst decline in living memory, demand for the resource is healthy and looks on course for good – if not extraordinary – things in the future. Many are united in the view that demand is not what it was, though the opinion – held mostly by environmental activists – that the industry is headed for an imminent collapse is overblown.
Going by the IEA’s annual Medium-Term Coal Market Report, global demand for coal is on course to break the nine billion ton mark by 2019, and demand in this period will grow at an average clip of 2.1 percent, down on the 3.3 percent rate for the period spanning 2010-13. “We have heard many pledges and policies aimed at mitigating climate change, but over the next five years they will mostly fail to arrest the growth in coal demand,” said the IEA’s Executive Director Maria van der Hoeven at the report’s launch.
China, irrespective of its shrinking consumption habits, will account for some three fifths of the growth in the coming half-decade, with the rest stemming mostly from India and emerging ASEAN nations. Going by IEA figures, the use of coal in electricity generation will grow 33 percent, and demand for coal in South-East Asia is tipped to average 4.8 percent a year up until 2035.
For India, whose ambition to overtake China is within reach, coal has played a decisive part in meeting its rising electricity demands, and ambitious production targets mean that the country will be largely self-sufficient – at least as far as coal is concerned – before the decade is up. “The next big hope is India, but the fiscal situation means the government cannot afford to continue importing expensive coal and subsidise electricity prices,” said Leaton. The obstacles are proof enough that poorer nations are by no means free of the pressures dogging the US, China and others. And while the arguments in favour of coal have suffered on financial grounds, it’s really the environmental pressure that’s eating away at growth. “This still means coal consumption will continue in these major domestic markets – but we could see demand flattening off, rather than the continued growth the industry is banking on.”
Chief among the environmental pressures weighing on coal is the divestment campaign, which has seen numerous – and notable – investors withhold their capital in light of the resource’s impact on the planet. Similar to that which transpired in the case of tobacco, munitions and adult services in years passed, the divestment push has been gaining traction for little over three years, and its place in policy discussions is growing in stature. Beginning with a small band of socially minded individuals, the movement has spread to pension funds, asset managers and even fossil fuels companies.
Mindful of its impact on climate change, Total, the French oil giant and one of the world’s six ‘supermajor’ fossil fuel companies, recently confirmed its withdrawal from coal production and marketing. “We cannot claim to be providing solutions to climate change while continuing to produce or market coal, the fossil fuel that emits more greenhouse gas than any other,” said the company’s CEO Patrick Pouyanné of the decision. Likewise, German utility company E.ON has split in two, with one part focused on fossil fuels and the other renewables, to both appease the watching public and reduce its environmental footprint.
Other notable withdrawals include Norway’s $900bn pension fund, which confirmed its intentions mid-year, and the US pension funds CalPERS and CalSTRS, which were each left with no option but to divest upon the passage of SB 185 – otherwise known as the California divestment bill.
Fearful that ambitious international agreements on climate change will enter into force in the years and months ahead, those with an exposure to coal see the financial argument as reason enough to exit the coal industry. However, stubborn names will see that there are opportunities enough, namely in emerging Asia and Africa, to justify their involvement. What many may fail to justify is their contribution to climate change, and for as long as the pressure mounts on companies to accept some degree of responsibility for rising emissions, investment in coal – if only from a reputational standpoint – is unjustified.
“There are still some portions of the world, such as Indonesia, that appear to have strong demand in the near term, but it is hard to imagine a bullish long-term outlook given the likelihood for eventual public pressure to reduce air pollution, coupled with the continuing decline in cost of renewable energy,” said Bakal. “In areas of the world that are not yet served by an electrical grid, it is now cheaper to build distributed generation and microgrids than build large centralised coal plans and expansive grid infrastructure.”
Assertions that the industry is facing a terminal decline are perhaps a tad premature and, sparing a sudden and dramatic sea change, coal will find favour among emerging economies for which the resource represents a quick fix to the issue of electrification. What has changed is an unerring focus on, and increased awareness of its drawbacks. According to Leaton: “What is needed now is a responsible approach to managing the exit from coal, and ensuring that environmental and pension liabilities are covered.” Royal no more, king coal’s status has diminished to a cheap, polluting and non-renewable resource, fit only perhaps for the short-sighted and inexperienced players on the global energy stage.