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Is coal now in terminal decline?

Is coal now in terminal decline?
China is cutting back on its coal consumption

Coal is on the way out.

At least, that’s what politicians and delegates at climate change conferences would have us believe, aspire to and yearn for. And in many respects they are getting their way. In the western world the political fall-out from any decision to build a new coal-fired power station would be incalculable.

In the UK for example, the Chinese and the French have been called in to manage the nuclear power programme, a potent combination considering the centuries of historic enmity with the French and current global friction involving the Chinese.

But putting the French and the Chinese in charge of the UK’s nuclear power is nonetheless preferable to developing further coal-fired power stations – that is a measure of where we’re at in terms of coal.

And, for the avoidance of doubt, these are still considerable coal reserves in the UK itself which at previous production rates could last for another 350 years.

But the UK is not the only country now cutting back on coal. The US has some new coal-fired plants planned and others in construction, but although that in itself might raise the hackles of the environmentalists, the more meaningful number is that plans for more than 100 new coal-fired plants have fallen through in the past decade or so.

More surprisingly, the tide appears to be turning in China.

China has become famed worldwide for the pollution of its big cities, with coal-fired power thought to be the biggest cause. At one stage it was thought that China would continue with plans for hundreds more new coal-fired stations as a growth at all costs culture predominated.

Now though, the Chinese government is taking a more nuanced approach, fearful of alienating its middle class - now the largest in the world – by presiding over cities that aren’t fit to live in.

According to estimates from the International Energy Agency, over the last four years China has cut the amount of power that it derives from coal from 80% to 70%, and that’s a trend that looks set to continue.

A decade ago, Chinese planning may have been about growth at all costs. Now, it’s more targeted.

“Coal demand in China is sputtering as the Chinese economy gradually shifts to one based more on services and less on energy-intensive industries,” the IEA said in commentary released at the end of last year.

It also highlighted that new Chinese hydro, wind, solar and nuclear power projects are eating into coal’s market share.

It’s a pincer movement that’s hit the coal industry hard, and sent investors running for the exits.

This week, Peabody Energy (NYSE:BTU), one of the US’s most venerable coal companies, stunned the market when it said it might file for chapter 11 protection in the under the US’s standard bankruptcy procedures.

There have been a spate of smaller redundancies, including Alpha Natural Resources, which suffered four years of losses before throwing in the towel in 2015, and Patriot Coal, which is set to hand its mines over to new owners in return for an assumption of Patriot’s restructured debt obligations.

Arch Coal and Walter Energy are other recent US casualties.

UK-based mining majors are also feeling the pinch. Glencore (LON:GLEN) is a part owner of the Wiggins Island Coal Export Terminal in Queensland, which only opened for business last year.

Now, two of Glencore’s partners, Bandanna Energy and Cockatoo Coal have gone into administration, leaving the remaining partners with an extra A$150 mln a year in costs to split between them.

And at the smaller end of the market, companies like Coal of Africa Limited (LON:COAL) have seen their share prices plunge in recent years, while others like Atlantic Coal have taken themselves off the market altogether.

One comparative success that runs against this grain is Oracle Coalfields (LON:ORCP), whose shares are trading up at close to three year highs at the moment, on the strength of backing from a Chinese major for a large coal project in Pakistan.

Oracle is symptomatic of another trend: that outside the West and China, coal-fired power stations are still being green-lit. But whether that’s enough to rescue the coal mining industry from apparent unstoppable decline remains to be seen.

 

 

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