Stranded assets

Stranded Down Under?

Summary

This report from Oxford university looks at the factors that will reduce China's use of coal, and affect the viability of Australian coal mines. 

China has recently increased its use of coal, causing the price of coal to rise. This has driven a huge expansion in coal mining, with plans for more to come. However for many reasons, China will most likely reduce its' imports of coal in the future leading to over capacity in coal mining.

With a glut of coal, the price will drop leaving many coal mines uneconomic. Much of the private and government investment in Australian coal mines will become "stranded assets".

Report  Authors:  Ben Caldecott, James Tilbury, Yuge Ma

This page and all charts are from their report.

World coal price over last ten years

Chinese coal demand

China now accounts for half the world’s coal consumption.
China has abundant coal reserves, but these have not been exploited quickly enough to meet growing demand, with the result that it became a net importer of coking coal in 2004. disrupting world markets.

This sudden increase has disrupted the world coal market and China has become the price setter for coal. The domestic market that is now three times the size of the international coal trade. 

 

China imports 8% of its coal. 

If it reduces coal usage by 8%, that means no imports.

The price will fall and mines will close.

 

 

Coal use by China  -  Domestic and imported

China’s coal consumption provided by imports

Reduction in coal use is quite likely due to a range of factors:

  • Concern over air pollution
  • awareness of global warming
  • Volatile international markets
  • A wish to be more self sufficient
  • domestic shale gas
  • water scarcity - for cooling power stations
  • falling costs of clean energy
  • carbon pricing
  • reduction in steel demand due to decreasing investment in infrastructure
  • energy efficiency

Coal boom or bust?

Investors have too often rushed to invest in the latest hot investment: Jojoba, avocados, alpacas, nickel, gold, etc, only to discover a glut. Are too many rushing to cash in on the coal boom?

According to the Australian government’s Bureau of Resources and Energy Economics, there are 89 coal projects planned for Australia, with a total potential capacity of 550 million tonnes (Mt) per year, almost all of which is planned to meet export demand. By comparison Australia produced about 430 Mt of coal in 2011. More than half the potential increase in capacity could come from just 13 mines, each of which is expected to have an annual output of 10 Mt or more. 

The total investment planned for these mines is $50 billion.

Planned investment in Australian coal projects

Cost of production

According to Wood Mackenzie at least half Australia’s coal mines operate at a loss when the price of coal is below US$96/tonne.
At the time of writing (2013) the price of Australian coal was about US$85/tonne and according to a forecast by the World Bank (Figure 31) the price of coal is expected to continue to decline in real terms.

When/if the mega mines open there will be a glut of coal and the price could drop. Investment in these mines could be lost or stranded.

Australian share of market

According to BP the world consumed 3,727 Mt of coal in 2012.
Depending on the scenario, the IEA forecasts that world coal demand will be between 5,307 and 6,404 Mt in 2020. That is an increase in consumption of between 1,391 and 2,607 Mt between 2012 and 2020. During that period Australia plans on bringing online an additional 550 Mt of coal production.222
By comparison Australia is estimated to have produced 421 Mt in 2012, 223 or 11% of world consumption. If Australia is to sell all that additional coal it will have to increase its share of the world coal market from 11% to 15-18%.

China imports by country in 2013

Royalties and public investment

The coal mining industry paid AU$3.1 billion in royalties to the
Queensland sate government and AU$1.3 billion to the New South Wales government in 2008-09.12
In Australia royalties for the extraction of resources are paid to the state governments, although revenues from the carbon price are collected by the national government. The Queensland government in particular, 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.

Australian production of coal

International Energy Agency - world coal demand forecasts

The Stranded Assets Programme at the University of Oxford’s Smith School of Enterprise and the Environment was established in 2012 to understand the risks in different sectors.

University of Oxford - Stranded assets report

Other useful source: http://www.carbontracker.org/

No market for Galilee coal, not even in energy poor India

By Tim Buckley on 6 May 2014

As Chinese coal consumption growth continues to slow, attention is increasingly turning to India.

We have undertaken in-depth financial modeling to evaluate the prospect of India as the next big thermal coal import market. The results demonstrate that fundamental structural problems confront companies looking to invest in coal export projects aimed at the Indian energy market, with the financial outlook for coal proposals already bad and anticipated to become worse.

With regards to anticipated Australian coal export proposals, the landed cost of imported coal from the Galilee Basin will require a price approaching US$90/t to recover costs – more than treble the current domestic coal price in India. Coal fired generators burning Galilee Basin coal will only be able to do so profitably in a scenario in which the wholesale price of electricity is up to double current levels.

Renewable energy costs (especially solar) are already below the cost of imported coal-fired electricity generation, and will not rise. For these reasons, we believe that the prospects for a sustained growth in coal imports into India are rapidly receding as projects are delayed.

Why is India critical for coal exporters?

In 2013, China consumed 50% of the world’s thermal coal. Unpinned by Chinese coal demand growth of 10% pa for the last decade, the global coal market has seen robust overall demand in this period. However, if one looks at the world excluding China, there has been a net decline in coal demand in the last decade. With Chinese coal demand growing at a subdued 2.6% in 2013, and the forecast for only very modest demand growth in 2014 – Bernstein’s seminal report of July 2013 titled “The beginning of the end of coal” is rapidly being validated.

In this context, India is increasingly critical to the stability or continued growth in the seaborne traded coal volumes. Domestic Indian coal production growth over the last five years of 3% pa has been insufficient to keep up with electricity demand growth of 6-7% pa. This has seen imports move from 10% to 20% of the total thermal coal market in India in this period.

Accounting for over 15% of total coal imports globally in 2013/14, India has long been viewed as the key new source of demand growth for the global seaborne coal market as Chinese demand falls away. Contrary to conventional thinking, we expect India’s coal import growth to slow rapidly over the next five years.

Pressure points likely to constrain growth in India’s coal imports beyond 2014.

New imported coal-fired power costs double the Indian wholesale rates

In conjunction with Equitorials, an Indian financial modeling group, we have evaluated the required cost of wholesale electricity for a new coal fired power plant in India relying on imported coal.

We have made specific reference to coal sourced from Adani’s Carmichael and GVK’s Kevin’s Corner proposals in the Galilee Basin in Queensland. We use our estimate of the full cost of production for each of these two mines, that being A$72/t and A$69/t respectively. To this we add a profit margin of A$10/t to cover the interest servicing costs and return on equity sufficient to justify the A$4-5bn mine construction capital cost. This gives a free-on-board price requirement of A$82 and A$79/t. At the current A$/US$0.93, this translates to US$77/t for Carmichael and US$74/t Kevin’s Corner.

coalBy comparison, the latest spot price for Newcastle benchmark 6,000kcal thermal coal is below US$75/t. We note the energy content of Galilee coal is 10-15% below the Newcastle benchmark. The ash content of Carmichael coal is three times that benchmark average, while Kevin’s Corner is in line with the benchmark.

Taking into account A$15-20/t for 400-500km of rail transport, A$5-6/t for port charges and A$16/t for shipping, we estimate the all in transportation costs of moving coal from the Galilee to coastal India at A$35-40/t.

Equitorials modelled the cost of constructing a new imported-coal based power plant in coastal India. With an assumed 3-4 year construction and commissioning period, the delivered cost of electricity in 2018 using Galilee coal is estimated at Rs5.40-5.70/kWh. This is 40-90% above the current wholesale price of Rs3.00-4.00/kWh and treble the Rs2-3/kWh average of domestic-coal based power purchase agreements (PPA) signed over the 2006-2009 period that are now coming 

More ... Renew Economy

This article is a summary of our full report, “Indian Power Prices”.[i] This report is for information and educational purposes only. It is intended solely as a discussion piece focused on the topics of the Galilee coal export sector, in conjunction with the Indian electricity sector.

Prof Ross Garnaut:

China cuts coal intake, weighs carbon emissions cap

China’s appetite for thermal coal may already be in decline, allowing Beijing to make bolder promises to reduce ­carbon emissions, according Ross Garnaut, one of Australia’s most eminent economists and China watchers.

Professor Garnaut projects that China’s consumption of thermal coal will fall at an average annual rate of 0.7 per cent from now to 2020.

…“Australian-based coal producers have made large investments in expanding capacity at home and abroad since the outlook changed in 2011…Little of the incremental investment since 2011 will return the cost of capital to shareholders and all of it ­lowers returns to past investments by lowering price. Catching up with reality sooner rather than later will limit the amount of good money that is thrown after bad.”  Aust Financial Refiew