MAC: Mines and Communities

The end of coal?

Published by MAC on 2020-12-23
Source: NYT, The Guardian, Splash247

China has officially blocked coal imports from Australia after months of vague restrictions.

Very interesting that the Institute of Energy Economics and Financial Analysis says ‘the financial markets are no longer really differentiating between coking coal and thermal coal’. For years the majors have tended to argue they will quit thermal coal, but that there will always be a market for coal for making steel. Very rapidly, new technologies might be blowing away that idea. Given BHP hasn't been able to sell its thermal coal mines, will they be also left with metallurgical coal stranded assets too?

Japan accounted for 27 percent of Australia’s roughly $50 billion in coal exports last year, China was not far behind at 21 percent, and India was third at 16 percent. China is said to prioritise coal imports from Mongolia, Indonesia and Russia.

See also:

2020-10-26 World Bank backs coal megaproject despite green pledge

2020-07-17 Coal gets doomed even further by Covid-19

2020-01-23 End-of-Week Essay: How Capital is galloping away from Coal

2020-01-16 Black Rock tries to come clean

2019-11-01 Coal is losing the energy battle - Bloomberg journo predicts

China Battles the World’s Biggest Coal Exporter, and Coal Is Losing

China has officially blocked coal imports from Australia after months of vague restrictions. For Australia, the world’s largest coal exporter, the decision is a gut punch.

Damien Cave

Dec. 16, 2020

SYDNEY, Australia — China is forcing Australia to confront what many countries are concluding: The coal era is coming to an end.

China has now officially blocked coal imports from Australia after months of vague restrictions that dramatically slowed trade and stranded huge ships at sea.

For Australia, the world’s largest coal exporter, the decision is a gut punch that eliminates its second-biggest market at a time when many countries are already rethinking their dependence on a filthy fossil fuel that accelerates the devastation of climate change.

While Beijing’s motives are difficult to divine, there are hints of mercantilist protection for local producers and the desire to punish Australia for perceived sins that include demanding an inquiry into the source of the coronavirus. China’s commitment to cut emissions may also allow it to be marginally more selective with its vast purchases.

Whatever the reasoning, the impact is shaping up to be profound for a country that has tied its fate to coal for more than 200 years. Mining policy can still decide elections in Australia and the current conservative government is determined to do the bare minimum on climate change, which has made China’s coal cutback a symbolic, cultural and economic shock. 

“A transition has been forced upon us,” said Richie Merzian, the climate and energy program director at the Australia Institute, an independent think tank. “It’s hard to see how things will really pick up from here.”

The realization, if it holds, may take time to sink in.

Prime Minister Scott Morrison has ridden Australia’s traditional reliance on fossil fuels into power. He famously held up a hunk of coal in Parliament in 2017, declaring “don’t be scared,” and first became prime minister in an intraparty coup after his predecessor, Malcolm Turnbull, tried to pursue a more aggressive approach to combating climate change.

“Coal-Mo,” as some of his critics call him, dismissed concerns on Wednesday about China’s ban, arguing that there are many other countries still lining up for the product.

“I should stress one point, that our biggest coal-exporting country, the country that takes our exports largest on coal are actually Japan and India,” he said. “So China is not our major importer when it comes to thermal or metallurgical coal.”

While Japan accounted for 27 percent of Australia’s roughly $50 billion in coal exports last year, China was not far behind at 21 percent. India was third at 16 percent.

Mr. Morrison’s faith in coal is hardly unique. The combustible rock is a most Australian product. It was first discovered on the continent in 1797, less than a decade after the first British settlers arrived. Since then, entire communities have been built around not just mines but also sprawling ports where cargo ships lug mountains of coal all over the world.

It is not a huge job producer. Only about 50,000 people worked in coal mining last year in Australia. (Plumbers clocked in at around 80,000.)

But it is a huge moneymaker. Coal production in Australia has more than doubled over the past three decades, with the share that is exported jumping to 75 percent in fiscal 2017, up from 55 percent in 1990.

Coal royalties for one state alone, Queensland, approached $4 billion last year.

And in many areas, from the Hunter Valley a few hours outside Sydney, to Mackay near the Great Barrier Reef, coal has long been a constant. It’s what you see on trains and at sea. It’s what put Australia on the global map. For many, it’s what inspires nationalist pride.

China’s ban, which started gradually reducing imports in August, is deflating that image.

Glencore, one of the largest coal mining companies in Australia, temporarily closed several of its mines in September and October.

In Mackay, where coal volumes from the ports have been dropping, the fear of lost jobs and a lost way of life has been increasing.

The stocks of Australian coal companies collapsed this week after the China news hit the markets.

And there is little sign of improvement. One pricing agency, S&P Platts, has estimated that in the first quarter of next year alone Australia will lose out on sales of up to 32 million metric tons of thermal coal — the coal for power plants — that would have gone to China.

China, in many ways, is simply the face of a more significant global disruption.

Japan announced earlier this year that it would retire about 100 of its most inefficient coal plants and invest in renewable energy. The country’s new prime minister announced in October that it would be carbon neutral by 2050.

South Korea and Taiwan, two other buyers in Australia’s top five, have also announced sharper targets for emission reduction, which would most likely mean less coal.

“It’s not market forces, it’s politics all the way down,” said Robyn Eckersley, a political scientist at the University of Melbourne who specializes in climate change. “The politics leads to a drying up of markets.”

For the coal industry, the broader trends beyond China are raising more concern. The United Nations’ scientific panel on global warming has repeatedly emphasized that a radical transformation of the world economy is needed to avoid devastation, calling for a rush away from coal.

There are signs that it could be happening faster than the industry expected.

But there are also industry veterans who note that the politics and economics of energy tend to be fluid, and that coal cannot be counted out just yet.

“None of this stuff happens very rapidly,” said Clinton Dines, the former head of BHP China, a subsidiary of the Australian-British mining giant.

Specifically, he said that while there are signs of a transition away from coal in some countries, coal-fired power plants in India, China and elsewhere are still being built, even if total demand declines. It is also unclear, he added, how long the favorable politics and generous subsidies around renewable energy will last.

“You’ll probably get a spurt in the next couple of years,” he said. “Once the voting populace has to pay for it, it’s a different matter.”

With China, of course, trade is always a complex calculation with a web of products and companies. Even after Beijing has targeted Australian coal, wine, barley and beef, Australia’s exports to China may end up flat or up for 2020, with iron ore accounting for roughly half of the total. Mr. Dines argued that China might lift the coal ban after its businesses grumble.

But with energy now intersecting with economics and the health of the planet, many coal critics in Australia are feeling ebullient, as if a turning point has already been reached. Banks in many countries are refusing to finance coal projects. There’s a new president in Washington who has pledged to join the worldwide effort to move away from fossil fuels — and Mr. Morrison’s stance, including his refusal to commit to net zero emissions by 2050, is increasingly leading to alienation on the global stage.

Last week, Prime Minister Boris Johnson of Britain rescinded a request for Mr. Morrison to speak at a United Nations summit focused on climate change, questioning whether Australia was doing enough to earn the slot.

“Australia is like the party boy that is still living like a 20-year-old in its 40s and 50s,” said Mr. Merzian at the Australia Institute. “Everyone is taking it seriously because their health depends on it and they know better, but Australia is still trying to rage on.”

No matter how much Australia’s leaders want to hold onto coal, “the shock is coming,” said Alex Turnbull, an energy investor based in Singapore who is also the son of the former prime minister.

It’s time, he said, to find a way to support the communities that have been told for decades that coal will always be there to save them.

“We need to just realize that this game is over here as far as export markets, which are looking very challenging,” he said. “If you’re Scott Morrison, you need to pivot or rip off the Band-Aid, or change the narrative. This is as good an opportunity as you can get because ultimately, it’s not your fault.”

The end of coal? Why investors aren't buying the myth of the industry's 'renaissance'

At the world’s biggest coal export port in Newcastle, no China-bound ships are waiting or scheduled to load before Christmas.

Ben Smee and Ben Butler

12 December 2020

Three years ago, pictures of bulk carriers queued off the coast of Mackay in central Queensland were framed as evidence of a “renaissance” in the coal industry.

There were more than 70 coal ships in the offshore gridlock in December 2017. This year there are just 12 waiting – equalling a record low mark set at the height of the coronavirus pandemic.

At the world’s biggest coal export port in Newcastle, no China-bound ships are waiting or scheduled to load before Christmas. More than 50 ships carrying Australian coal are reportedly waiting off the Chinese coast.

In the face of falling coal prices and volumes, the industry and governments have remained bullish about coal’s long-term prospects. They say twin pressures of the pandemic slowdown and China’s ban on Australian coal will ultimately pass.

In an apparent show of faith, the Queensland government took a 9.9% stake in the float of Dalrymple Bay Infrastructure (DBI) – one of two large terminals in Mackay, the main hub for exports from the Bowen Basin. The investment was welcomed by the resources sector as “a clear vote of confidence ... in the role of resources in Queensland’s Covid-19 recovery and economic growth for decades to come”.

DBI was launched on the Australian stock exchange this week with government backing and the broader market surging. It was the second biggest Australian IPO this year (the largest, tech company Nuix, gained 63% on debut last week). DBI also promised investors a handsome 7% dividend.

When the stocks hit the market, DBI tanked, down 16%. It gained no ground the following day. Investors were not buying the pitch that coal has a rosy future.

“It’s a pivotal moment,” says Tim Buckley, an energy markets expert at the Institute of Energy Economics and Financial Analysis.

“The financial markets do move so much faster than the real world, they are all about constantly reevaluating the risk-return and growth prospects.

“There’s no long-term growth prospect at all for the [coal] industry. It’s like trying to catch a falling knife.”
The bleak outlook

Australia’s biggest super fund, AustralianSuper, has committed to hitting net zero emissions across its $200bn investment portfolio by 2050 – but has not specifically ruled out investing in coal projects.

Nonetheless, its chief executive, Ian Silk, seems less than enthusiastic about the idea.

“The economic outlook for coal stocks generally is incredibly bleak, for obvious reasons,” he says.

He says Aussie would approach any particular coal project on its financial merits.

“But it’s pretty plain by the way we’re so underweight coal that that’s not an attractive sector,” he says.

Silk is not alone. Institutional investors – the big pension funds and other piles of money that provide much of the capital businesses need to operate – have increasingly turned away from coal and other fossil fuels.

Norway’s Government Pension Fund Global, which at US$1.2tn is so big it holds about 1.5% of all the shares in listed companies in the world, has strict rules forbidding it from investing in companies that produce more than 20m tonnes of thermal coal a year or produce power of more than 10,000MW a year from burning coal.

As a result, in May it excluded from investment two big multinationals that mine coal in Australia, Glencore and Anglo American, as well as Australian power company AGL Energy.

It also put BHP on notice that it could dump its stake in the Big Australian if it didn’t get out of thermal coal.

In Australia, the big banks have displayed an increasing unwillingness to lend to coal, with ANZ in October saying it would not write new loans to businesses with more than 10% exposure to thermal coal and existing customers with more than 50% exposure would need to show it “specific, time bound and public diversification strategies” to continue receiving the bank’s cash.

The harder line from banks followed warnings from their regulator, the Australian Prudential Regulation Authority, that they needed to consider climate risks when making decisions.

Apra member Geoff Summerhayes laid down the regulator’s position in a speech in 2017 that was met with howls of dismay and derision by some.

This week, he said the criticism “was good impetus for me to actually go harder, because it’s very much a financial risk with real prudential implications”.

The Queensland bellwether

It is easy to blame the failure of Australian coal prospects to re-emerge from the pandemic on the situation in China. However, there are growing signals the industry is heading into its final bust cycle.

A few days before the Dalrymple Bay terminal was floated, the largest coal producer in Australia and the western world, Glencore, released its annual investor update and – critically – announced new plans for a “managed decline of its coal business” and net-zero emissions by 2050.

While those plans are ultimately long-term (and also play to the company’s strategic interest by seeking to keep prices at viable levels by constraining supply) they also show the company expects volumes to drop substantially – up to 20% – in the next few years, compared to previous projections.

The same investor update last year envisaged Glencore would produce 140m tonnes of coal in 2022. Now the company only expects to mine 115m tonnes that year. It might consider mine-life extension projects but has no plans to develop new coal mines.

Coal is also on the nose at Australia’s two big mining companies, BHP and Rio Tinto, which have turned away from the black rock and towards red ones as the iron ore price continues to soar.

Rio Tinto sold its last Australian coal mine in 2018 and, under pressure from investors, BHP has promised to get out of thermal coal – burned in power plants – within two years but so far has found no buyers.

Of particular concern to miners in Queensland is the way financial markets have treated metallurgical (or coking) coal, which is used in steelmaking. More than 80% of the exports from Dalrymple Bay are metallurgical coal.

In the days before the DBI float, company chief executive Anthony Timbrell told the Australian Financial Review it would seek to emphasise the difference between metallurgical and thermal (energy producing) coal.

“I guess it’s our job to draw out that story and remind people of the complexity,” Timbrell said.

Thermal coal is the primary target of environmental activists; while metallurgical coal is less susceptible in the immediate-term to a global energy pivot towards renewables.

BHP has also been keen to draw the distinction, which is in its financial interests as metallurgical coal attracts a higher price than thermal coal.

However, as excitement builds around the prospect of (as yet, not commercialised) steelmaking alternatives like green hydrogen, the financial markets increasingly appear to be making little differentiation between the classes of coal.

Buckley points to a graph comparing the US and Australian metallurgical coal producer Coronado with Australian company Whitehaven, which largely mines thermal coal.

Since Coronado was listed in 2018, both Coronado and Whitehaven’s shares have dived almost in harmony by about 65%. The All Ordinaries is up about 20% over the same period.

“The financial markets are no longer really differentiating between coking coal and thermal coal,” Buckley said.

“Dalrymple Bay is a really interesting bellwether for Queensland. Having already been priced down, having failed to get institutional support, taxpayers effectively did a bailout.

“The vendor (Brookfield Asset Management) is the most successful investor in energy infrastructure, and you don’t buy from the most successful energy investor in the world and think you’re getting a bargain.

“This isn’t a resources sector problem either, this is a coal problem. The Australian resource sector is having the best year in history, iron ore prices are at phenomenal highs. It’s the fossil fuel sector that’s on its knees.”
The end of the line

The coal company run by John Canavan, the brother of Queensland senator Matt Canavan, went under earlier this month.

The company, ICRA Rolleston, is a junior joint venture partner with Glencore in the Rolleston thermal coal mine in Queensland. Glencore will continue to operate the mine but a court case finalised last month showed how the collapse in the coal price had turned the mine into a loss-making venture.

John Canavan’s share of the mine’s costs were about $14m more than sales revenue in August. Glencore expected another $4m shortfall by the end of the year.

The Queensland Exploration Council (an offshoot of the Resources Council) this week released a report card showing some growth in spending by coal speculators during 2019-20 and said there was “definitely a feeling of growth and optimism in the sector”. In the detail of its report, though, for the first time in four years the QEC downgraded its view on coal prices, saying these has become “cause for concern”.

In its prospectus for potential investors, DBI warned about a series of “risks” that included its customers collapsing due to low coal prices, or long-term decline in global coal demand.

Its most significant new investor, the Queensland government, released a study in September that stated “there is a substantial degree of uncertainty” about assumptions used to underpin long-term market projections, including about the price of coking coal.

“Queensland Treasury’s analysis … highlights that Queensland’s future coal demand will continue to be primarily linked to key economies in north-east and south-east Asia. In particular, the future demand for Queensland’s metallurgical coal likely hinges on demand from the world’s two largest coal consumers, China and India.”

DBI’s warnings included that ongoing political tensions between Australia and China could ultimately result in a decline in coal exports from the port.

“Demand for metallurgical coal … or coal generally may reduce over a period of time due to a variety of reasons, including reduced demand from key coal export markets, such as China, Japan, Taiwan, South Korean and India.”

In addition to China’s import restrictions, China, Japan and South Korea – Australia’s three largest coal customers – each announced aggressive pivots towards net zero emissions this year.

Adding to DBI’s troubles is the nature of its business – where contracts with exporters are regulated by a competition authority. The port’s capacity is fully allocated. Unable to raise prices or attract new customers, its pitch to investors has been about expanding its capacity to grow the business, even as shipments are being shunned by China, export volumes contract, coal companies collapse and other Queensland ports face severe debt problems.

Of those terminals, Wiggins Island at Gladstone and the Abbot Point terminal near Bowen, owned by Adani, have both been operating at well below design capacity for all of this decade, a point Buckley and others say shows any expansion of Dalrymple Bay is not viable.

Abbot Point – where Adani’s debts are estimated in excess of $1.5bn – typically has a queue of about three coal ships. Earlier this week, there were no ships waiting to enter the port.

Mongolia, Indonesia and Russia the winners as Beijing formalises Australian coal ban

Sam Chambers

December 15, 2020

China has made its Australian coal ban official, sparking a swift response from Scott Morrison, the prime minister of Australia.

Splash has reported for the past three months a growing informal list of products Beijing has moved to block entry to, as relations between Australia and China have soured with Canberra leading the charge to seek out the origins of coronavirus. This has resulted in many coal carriers – and more than 1,000 seafarers – being stuck at Chinese anchorages for long periods.

There are currently 24 capes and 50 panamaxes laden with Australian coal waiting to discharge in China

Chinese state media yesterday confirmed the Australian coal ban, while removing restrictions on imports of the commodity from other countries.

The National Development and Reform Commission met 10 major power companies on the weekend and granted approval for them to import coal without clearance restrictions, except for Australia, according to the Global Times.

The report suggested China will prioritise imports from Mongolia, Indonesia and Russia.

Australian prime minister Morrison accused China today of breaching international trade rules.

From Tasmania, Morrison said the government was seeking clarification from Beijing about the reported coal ban, but if it was in place “that would obviously be in breach of WTO rules” and “obviously in breach of our own free trade agreement”.

According to Braemar ACM there are currently 24 capes and 50 panamaxes laden with Australian coal waiting to discharge in China, amounting to 8.7m dwt.

China has yet to make any discernible cuts to its iron ore purchases from Australia yet. However, the China Iron & Steel Association (CISA) has been in touch in recent days with senior executives from miner BHP to voice concern at the surging price levels for iron ore, something that could get more expensive if an Australian politician gets his way.

Amid the deteriorating trading partnership, former resources minister Matt Canavan has said the government must force Beijing to “pay a price” for trade bans on Australian products, suggesting a tax on iron ore exports to help out other local industries such as coal and wine hit by Beijing’s bans.


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