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Future of coal hangs in balance | MyWealth Commonwealth Bank
Coal mine, Hunter Valley (Image: AAP)

Future of coal hangs in balance

19 JUL 2013 10:00 AM   |  Filed Under: Companies

Yesterday the World Bank announced it would no longer fund new coal power projects in developing nations. The move reflects a global policy shift away from the current reliance on coal for future energy needs.

The issue was thrown into sharp relief earlier this year when thick black smog blanketed northern China, home to 196 coal-fired power stations, forcing China’s cabinet to respond with 10 new rules to cover emissions.

The announcement by the World Bank, which provides loans on special terms to assist developing countries, marks a formalisation of the move away from funding coal projects for cheap energy, except in the very rare case that there are no feasible alternatives to meet basic energy needs.

Instead, the World Bank said it will expand its work helping countries develop national and regional markets for natural gas, the fossil fuel with the lowest carbon intensity, in addition to increasing support for hydropower projects.

“We need affordable energy to help end poverty and to build shared prosperity,” said World Bank president Jim Yong Kim on delivering the report.

“We will also scale up efforts to improve energy efficiency and increase renewable energy – according to countries’ needs and opportunities.”

The move follows US president Barack Obama’s announcement last month that the administration would place tight restrictions on US government financing for coal projects overseas.

The announcement, which could put pay to millions of dollars in support for power plants in nations such as Vietnam and India, was announced in a speech at Georgetown University which outlined a “climate action plan” that included an order for the Environmental Protection Agency to limit carbon dioxide emissions from existing power plants.   

Energy in the balance

On their own, these two lenders withdrawing support wouldn’t be enough to shift the world’s energy supply away from coal, especially given that there are around 1,199 proposed coal plants currently on the drawing board globally, according to the World Resources Institute.

A massive 76% of the proposed plant capacity is in India and China, which doesn’t need to rely on Western sources of funding.   

The demand for new capacity from developing nations reflects a problem the World Bank has been grappling with for some time; namely how to find a balance between cheap energy needs of developing countries and efforts to slow global warming.

Currently, coal accounts for close to one-half of the world’s energy-related carbon emissions, according to the International Energy Agency (IEA), and those emissions increased 1.4% last year, despite the slowdown in China’s growth.  

Earlier this year the agency said that rather than limiting the rise in global temperature to the UN target of 2 degrees Celsius, at the current trajectory we would be more likely to see a 3.6-5.3 degrees Celsius rise.

In a climate change report released last month, Kim said it needs to be clear that “a two degrees Celsius warmer world would be a disaster that we have to avoid.”

Australian coal exports

Australia is the fourth largest producer of coal in the world after China, the USA and India, although we are the world’s largest coal exporter with 70% of what is produced here sent offshore, predominately to Japan, which takes 39.3% of Australia’s black coal exports.

There are two different kinds of coal mined in Australia. Black coal, which is predominately mined in NSW and Queensland, is used for domestic power generation and for export, while lower-quality brown coal is mined in Victoria and is predominately used in domestic energy production.

Two different kinds of black coal, both of which are produced in Australia are, in turn, put to different uses. Thermal coal, also called steam or energy coal is used in power generation. It is crushed and then burned to produce steam that drives turbines for electricity production.  

On the other hand, coking coal, which is also called metallurgical coal, can be heated to produce gases and coke, which in turn is used in a blast furnace to temper iron ore into steel.

Outlook for Australian coal companies

Australian coal miners have been confronted with a litany of production declines, job cuts and asset sales recently amid a 30% price slump in two years as cheap US shale gas replaced domestic coal demand and led to a 50% rise in US exports of thermal coal last year.

In May, listed producer New Hope described market conditions as “difficult” with lower market prices exacerbated by a slackening of manufacturing in China.

That same month a multi-billion dollar project for a new coal export facility in the Hunter Valley was put on hold while BHP switched contractors in its Queensland coal division as part of a drive to lower costs and said there were no new major projects planned.

Aquila Resources (AQA) meanwhile suffered a setback when Japan’s Sumitomo Corporation pulled out of a coal exploration partnership in April.

As global demand for coal increased, producers responded by investing in new mines and ramping up production. But as supply has subsequently grown and prices have fallen, some miners have been left with more coal than they can profitably sell. Long-term contracts with port and rail companies meanwhile have hampered the ability to respond to the increase in supply with ‘take-or-pay’ agreements meaning miners must either ship a minimum amount of coal or pay a high fine.  

Despite this backdrop however, some producers are making future plans, with Whitehaven Coal (WHC) receiving the go-ahead for its Maules Creek mine which is expected to deliver first sales in the second half of 2014.

What will happen to demand?

The IEA has been pushing for individual governments to enact policies that address the issue of cleaner energy, saying it can be done without harming growth.

Despite predictions that renewables will make up an increasing amount of power generation however, there is still a need for a reliable source of power to balance more intermittent supplies such as wind and solar, whether than be coal or gas.

In a note to clients earlier this year, CBA senior analyst Lachlan Shaw wrote that while coking coal is expected to record modest growth over the coming decade, thermal coal demand growth is expected to slow reflecting environmental and regulatory pressure “combined with aggressive advances in alternate energy sources such as natural gas and renewables.”

“By virtue of the current dominance of coal in the global energy mix, we do see coal retaining that mantle for the foreseeable future,” Shaw said. 

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.