Australian coal investments at risk of becoming 'stranded assets'

Published by MAC on 2013-12-18
Source: Statement, Mining.com

Australian coal investments at risk of becoming 'stranded assets' - Oxford study says

Ana Komnenic

Mining.com

15 December 2013

Australia's coal investments may have been in vain. New research suggests that Australian coal's second-biggest customer, China, could be headed for a coal-free diet.

According to a new report by Oxford University, commissioned by HSBC's Climate Change Centre of Excellence, China's demand for coal is changing. Driven by environmental concerns, political pressure, developments in cleaner technologies and gas markets, the Asian giant could reduce its consumption. This could drag down prices, putting Australia's coal reserves and infrastructure at risk of becoming 'stranded assets.'

As the world's biggest coal consumer, China certainly has the ability to shift coal prices.

"These developments are not factored into the positions that most coal owners and operators are currently taking" Ben Caldecott, co-author of the report said in a statement. "Policy makers need to wake up to these risks as well."

The study raises one main question: Should any more capital be allocated to new coal projects?

But Australia is in the midst of some major coal mine action. The country's Galilee Basin is bursting with coal-related projects such as Indian company Adani's proposed $10 billion Carmichael mine which would produce 60 million tonnes per year.

Many of these projects are only justified on the basis that China's coal consumption will rise, the report reads.

Study authors argue that in order to "minimise the risk of stranded assets, the companies involved should further interrogate the coal price assumptions underpinning the investment" of their projects. "Investors should seek clarity on the opportunity costs associated with deploying finite capital into them too."

The report also warns lawmakers against relying too heavily on coal production as a source of tax revenue.

"Less production will reduce royalty payments. The Queensland government in particular, notionally has much to lose from the mega-mines in the Galilee not going ahead."

But whether or not China will consume less coal is a matter of debate. Just last week the China National Coal Association (CNCA) announced its predictions that Chinese coal consumption will reach 4.8 billion metric tonnes by 2020, a 1.3 billion-tonne increase on 2012.

And although the government has recently made a push to shut down thousands of small coal mines, it's also introducing policies to support larger operations.

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Environment-related factors are changing China's coal consumption with potentially significant consequences for Australian coal assets, says new Oxford University study

Media Release

16 December 2013

The latest research from the University of Oxford's Stranded Assets Programme will be published on Monday 16th December.

The report is entitled, Stranded Down Under? Environment-related factors changing China's demand for coal and what this means for Australian coal assets.

The project was commissioned by HSBC's Climate Change Centre of Excellence.

"China's demand for coal is changing as a result of environment-related factors, including environmental regulation, developments in cleaner technologies, air pollution, improving energy efficiency, developments in gas markets and political activism," Ben Caldecott, co-author of the report and Director of the Stranded Assets Programme said.

"This could lead to less demand from China and lower coal prices, which would increase the risk that Australian coalmines, reserves and coal-related infrastructure become stranded assets.

"These developments are not factored into the positions that most coal owners and operators are currently taking. Policy makers need to wake up to these risks as well," he said.
"This report raises one simple question for investors, should any more capital be allocated to new coal projects?" Nathan Fabian, Chief Executive of the Investor Group on Climate Change (IGCC) Australia/New Zealand said.

Notes for Editors

China now accounts for half the world's coal consumption and its domestic coal market has grown to be three times the size of the international coal trade. As a result, China has fast become a major force in determining coal prices regionally and internationally.

The surge in coal demand has led to proposals for a large number of new coal projects and expansions around the world. Increasing demand from China is meant to provide the demand and price support to justify these projects, particularly in Australia.

But China's demand for coal is changing, particularly due to environment-related factors. Planned projects and mine expansions in Australia considered feasible based on high coal prices will not go ahead if prices are low and stay that way.

In the study the researchers suggest that to minimise the risk of stranded assets, the companies involved should further interrogate the coal price assumptions underpinning the investment case for each of these projects. Investors should seek clarity on the opportunity costs associated with deploying finite capital into them too.

Australian state governments would also be adversely affected financially by projects being abandoned or mothballed - less production will reduce royalty payments. The Queensland government in particular, notionally has much to lose from the mega-mines in the Galilee not going ahead.

It would be sensible for policymakers to minimise exposure by diversifying their tax base. State and federal governments can also reduce the risk of their own investments becoming stranded assets by limiting the use of public funds and resources that support coal-related infrastructure, such as ports and railways.

http://www.smithschool.ox.ac.uk/research/stranded-assets