Resurgent coal exporters should be wary of blinkered optimism: Russell

Prices have been on an upward trend since bottoming in 2016 after five years of losses, and miners are once again making good profits amid strong demand from top importers China and India, new consumers such as Pakistan and the reliable veteran buyers like Japan and South Korea.

But at the back of the minds of many Australian miners is the fear that they have seen this movie before, and they don’t want the same ending.

In 2012, the industry was cock-a-hoop over forecasts that pointed to massive import demand growth in Asia, led by China and India.

Mining and coal conferences at the time were well attended and featured masses of presentations from both junior and established companies, all with the common theme of how much they were going to invest in new mines and how much new production was coming to meet the massive Asian demand.

Problem was it was pretty much all wrong.

A well-respected industry consultant and forecaster boldly claimed in early 2012 that China would be importing 1 billion tonnes of coal by 2030, and India would be up to 400 million tonnes.

While this was probably the most bullish forecast, it wasn’t terribly out of line with several other predictions.

But these forecasts now look hopelessly optimistic, given China’s coal imports were 270.9 million tonnes in 2017. While imports have risen for two years, they are still well below the record 327.2 million tonnes from 2013.

While China’s coal imports may rise slightly this year, it’s unlikely they will reach 300 million tonnes, and that 1 billion tonne forecast looks well out of reach.

However, there is still no shortage of optimism among Australia’s coal miners, with industry group the Minerals Council of Australia releasing a report this week that harks back to the wildly bullish forecasts of the previous boom period.

OPTIMISM VERSUS REALISM

Asian seaborne coal imports will rise by 400 million tonnes from current levels by 2030, a more than 50-percent increase from 2017’s 740 million tonnes, according to the report, which was compiled by consultants Commodity Insights.

The methodology of the report assumes that all planned and proposed coal-fired plants across Asia will be built, and then also relies on macro-economic forecasts.

However, the trend is clear, planned and proposed coal-fired generation keeps getting cut back as the developed world largely turns away from the fuel, and as top importer China increasingly tightens environmental controls.

In the two years to January there was a 59-percent drop in announced, pre-permit and permitted coal-fired generation, according to a report compiled by environmental groups Coalswarm, the Sierra Club and Greenpeace.

While the report also shows operating coal-fired generation increased by 4 percent over the two-year period, it does seem clear that the pipeline of projects is slipping, and may in time not be enough to replace the closure of older power plants.

The optimistic forecasts also fail to account for political pressure to move away from coal, not only in China, but increasingly in India.

It’s likely that those countries planning on building coal plants powered by imports will also come under mounting pressure from environmental activists, who have become increasingly sophisticated in targeting how coal plants are financed and insured.

In fact, if there was another common theme to this week’s conference in Brisbane, it’s that the coal sector still doesn’t fully grasp that array of forces now being deployed against it.

The mantra of coal as ‘cheap and reliable and the only way to electrify the masses of people still without power’ was still repeated, and clearly believed.

But scratch a little further and miners will tell you of the incredible difficulties in developing projects, with increased government scrutiny and regulation, the rising threat of public opposition and the dearth of financing, notwithstanding a seemingly large pool of investment funds.

The inability of India’s Adani to actually start building its Carmichael mine in Queensland, the world’s largest planned mine aimed at supplying the seaborne market, plays on the industry’s mind, as does the virulent public opposition to the mine’s development.

The exit of major companies such as Rio Tinto from coal has also made developing new mines difficult, as those firms could fund a project off their own balance sheets, and didn’t have to seek investors, partners or project financing.

The lack of new supply also makes optimistic demand forecasts tricky.

If Asia genuinely was to demand 400 million more tonnes of coal by 2030, it would take an unrealistically massive effort to develop mines to produce this.

It simply can’t be done, meaning that prices would have to surge to either incentivise new production or cut back on demand as power generators switch to other fuels such as natural gas, or increase the use of renewables.

The Australian government’s commodity forecasts are for modest growth in the region of 2 percent for coal output and exports, while Indonesia, the world’s largest exporter of thermal coal, has a policy of lowering exports over time in order to keep the resources for domestic consumption.

With the world’s two biggest coal exporters not likely to boost their supplies to the seaborne market, the question is who can? And the answer is nobody really.

South Africa also has domestic needs and export infrastructure constraints, Russia has plenty of coal but infrastructure issues, and the United States and Canada could probably add several million more tonnes a year, but this would be nowhere near enough.

Overall, coal miners find themselves in the odd position of enjoying strong profits and growth in demand for their products, but equally largely unable to meet that demand because developing new mines is becoming too hard.

(By Clyde Russell; Editing by Joseph Radford)