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For more than a decade, the figures looked good. Australia’s thermal coal mining export industry was experiencing an unprecedented rise in the coal seaborne market.

Up to 2015 the numbers were singing. Australia was leading the market as the world’s biggest exporter of coal. But then something happened. Australia’s thermal coal exports lost their momentum. Volumes peaked as prices tanked. There were now other players on the block: newer, lower cost competitors in deflationary renewables, coupled with energy efficiency.

Since 2016, the coal fired power plant pipeline in major Asian markets has experienced a cumulative 74% decline, with more contraction expected. Over the same period, renewable energy prices halved. Yet it is the doubling of thermal coal prices since 2016 that has really caught the Australian mining industry’s attention.

In its latest forecast, thermal coal miner Glencore noted the price gains, and combined with massive cost reductions in integrating RIO Tinto’s thermal coal assets with Yancoal and its own, asserted a likely result of record profits. That is looking highly likely, near term.

While creating a positive outlook, we contend that the current boom in thermal coal prices is short term, and is accelerating the decline of the industry by undermining the viability of new import coal fired power plant proposals.

In our analysis, higher thermal coal prices and the increasing pressure for power plants to install emissions controls have translated into higher costs in the industry. Those higher costs have caused capital flight.

GLOBALLY, ONE IN 40 COAL PLANTS CLOSE EACH YEAR as they have reached ‘end of life’. That is an average of 24GW annually since 2010, according to Global Coal Plant Tracker.  In the absence of at least 24GW of new coal plants being commissioned each year, we would see shrinkage in the global coal power sector. That inflection point is rapidly approaching, probably 2022 at the latest given increasing plant closure trends.

Australia has not opened a new coal-fired power plant for a decade. A new plant is simply not viable in the Australian context absent massive capital subsidies, particularly given financial markets will likely impute a full carbon price impost at some point within the next decade.

In one of our potential export markets – India, there has not been one single coal power unit commissioned to-date during 2018/19, while ten units have been decommissioned to-date. India had 20GW of new thermal power plants commissioned annually in the four years to 2015/16. This net installation rate dropped 80% by 2017/18 and is still dropping.

Two of Australia’s key coal export markets – Japan and South Korea – recently announced a major policy rethink and are now implementing a range of settings framed around climate science, emissions reduction, carbon pricing, higher coal taxes, and an accelerated transition to build industries of the future to supply cheaper, more sustainable renewable energies plus energy efficiency technologies.

While two of Australia’s key Japanese customers – Marubeni Corporation and Mitsui & Co –– recently announced (September and October 2018 respectively) they are walking away from developing coal power plants and thermal coal mining respectively and pivoting to an accelerated investment in new lower emission technologies.

Japan and South Korea, the biggest providers of thermal coal global finance over 2010-2017, are withdrawing from their investment in new coal plants across Asia.

With the growing exit of private global financial institutions from the thermal coal sector, most new coal plants required to meet the optimistic forecast of the thermal coal mining industry must be built with subsidised capital. That capital however, is now increasingly scarce.

Journalist Matthew Stevens recently suggested in The Parallel Universes of Thermal Coal (4 November 2018) that without ongoing Japanese, South Korean and Chinese government capital subsidies being put into the thermal coal industry, coupled with the presumption that countries around the world will entirely fail on the Paris Agreement, the booming forecasts of Glencore are simply unachievable. We agree.

In its optimistic forecasts, Glencore failed to acknowledge the implications of Australia’s key end markets reconfiguring their policy settings away from thermal coal into sustainable cheaper renewable technologies.

Current and potential Asian markets are increasingly looking at renewables as the low-cost, domestic option as ever higher fossil fuel import bills are driving currency instability, higher inflation, and consequently higher interest rates. They are driving policies towards meeting their Paris targets and delivering better energy security, and they are exploring solutions to increasing air pollution pressures.

The global drive towards cheaper more sustainable renewables over thermal coal and fossil fuels is speeding up in Australia too. The Australian government’s recently acquired Snowy Hydro confirmed last month that new coal cannot compete with record low renewable energy infrastructure firmed by pumped hydro storage. Snowy Hydro’s 888MW tender of October 2018 was swamped, receiving over 17GW of new renewable energy investment proposals.

This transformation is being echoed around the globe.

The greater Asia region alone has plans to install up to 100GW of offshore wind by 2030. This alone could remove 300Mtpa of seaborne thermal coal demand, which is 30% of the global total from a singular development in technology. And the World Bank recently released a report calculating the scope for 400GW of floating solar globally, or an achievable 4,000GW of solar power (assuming countries around the world collectively aim to address the climate crisis), using just 10% of all freshwater reservoirs globally.

A company’s fiduciary duty to investors is to provide a risk-balanced assessment, including an evaluation of the growing impact of deflationary sustainable renewables and climate risk.

GLENCORE OMITTED TO MENTION THESE NEW GLOBAL DEVELOPMENTS or other competing technologies in its forecasts, other than referencing LNG in its new coal investor presentation.

Glencore failed to configure irrefutable climate science realities documented by the UN IPCC.

And in our view Glencore has failed to calculate that higher thermal coal prices are fostering faster technological disruption, accelerating the arrival of grid parity for renewables.

Glencore has failed to provide a complete picture.

The New South Wales government, an Australian state with the biggest thermal coal mining exports, has a lot to lose. Their current windfall in thermal coal royalties must urgently be put towards the development of a multi-decade transition plan for people and communities across New South Wales reliant on the thermal coal export industry.

Thermal coal is entering a perpetual state of decline, and investors, financers, governments, and communities need the full picture.

The current boom is a gift-horse for now.

The deflationary nature of renewable energy technologies globally indicates a looming sunset for the thermal coal mining industry. Australia needs a transition plan.

Tim Buckley is IEEFA’s Director of Energy Finance Studies, Australasia. He can be reached at [email protected].

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Tim Buckley

Tim Buckley, Director, Climate Energy Finance (CEF) has 30 years of financial market experience covering the Australian, Asian and global equity markets from both a buy and sell side perspective. Tim was formerly Director Energy Finance Studies, Australia/South Asia, IEEFA, and was a Managing Director, Head of Equity Research at Citigroup for 17 years until 2008.

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