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Blackballed: will coal bounce back from slump or is it terminal?

Some are now arguing the coal problems are not just coronavirus-related and go beyond cyclical.

Coal’s problem, says Sam Mostyn, an experienced non-executive director and deputy chair of the Centre for Policy Development, is that as the most carbon polluting of fossil fuels it is running out of friends.

Around the world central banks and governments are frantically building life rafts to keep key sections of their economies afloat until the pandemic recedes, says Mostyn. But there is not room to save it all. Hard decisions are being made and in some countries, indeed in some regions, coal is being cut adrift.

Coal’s problem, says Sam Mostyn, is that as the most carbon polluting of fossil fuels it is running out of friends.

Coal’s problem, says Sam Mostyn, is that as the most carbon polluting of fossil fuels it is running out of friends.Credit:

In May the European Union announced a green stimulus program worth $A1.2 trillion designed to immediately rebuild and decarbonise its economy. The EU is not a market for Australian coal, but the impact of the plan could be felt here nonetheless as Australia seeks to negotiate a free trade agreement with the block.

Closer to home South Korea – in 2016 the destination of 16 per cent of Australian thermal coal exports – has also announced a green stimulus which will eventually include tax hikes on coal imports and the closure of coal-fired power plants.

As South Korea decarbonises its own economy its government is considering legislation to ban its banks from financing coal-fired power plants in neighbouring countries, places like Vietnam, a key growth market for Australian exports.

During an industry briefing last month in Vietnam the government-affiliated Vietnam Energy Institute outlined a revised energy plan that included a fast-tracking of renewable and gas power projects and the cancellation of seven planned coal projects.

The news for coal is better in China which has massively ramped-up approvals for new coal-fired power plants as part of its economic recovery plans. But China, like India, has also announced it intends to increase domestic production with a view to cutting dependency on imports.

“The country which has the fourth largest coal reserves in the world and is the world’s second largest producer, why can’t it become largest coal exporter in the world,” India’s Prime Minister Narendra Modi said last month.

Mostyn is not sure that in a post-coronavirus world Australia’s corporate culture will automatically re-embrace coal, just as she does not believe its problems began with the pandemic.

Back in 2016 the Centre for Policy Development sent a shiver through the nation’s boardrooms when it commissioned and published a legal opinion by Noel Hutley, SC, on advice from MinterEllison.

He opined that that directors who do not properly manage climate risk could be held liable for breaching their legal duty of due care and diligence. The Hutley opinion was endorsed by the financial regulators and in the Reserve Bank of Australia’s Financial Stability Update last year.

Mostyn believes the drought, heatwaves and bushfires that preceded the pandemic in Australia had a profound impact in Australian boardrooms.

“As we came out of the bushfires I felt a distinct shift in the response of many senior [company] directors in Australia to climate change. It wasn’t just that they saw risk all around them, it was also deeply personal. Many took this back into boardrooms with them,” she says.

In January the world’s largest asset management outfit, BlackRock, with $10 trillion on its books, announced it was placing climate change at the centre of its investment strategy and dumping companies heavily invested in thermal coal from its actively managed funds.

In its May update BlackRock outlined the divestments it had already made, but it went further too, revealing that it had backed votes for and against director seats in major companies based on how individual executives had voted on climate issues. It even fired off a “please explain” to Kepco, the South Korean utility that funds coal power stations in Australian coal markets.

Signs of flight from the sector are not hard to find.

Tim Buckley, an energy analyst with the pro-renewables research outfit Institute for Energy Economics and Financial Analysis, keeps a running total of the number of major international financial institutions that are now blackballing coal.

The count as of August 13 was 139 globally significant banks, insurers and asset owners including 49 new or improved commitments made this year.

The impact is being felt across the Australian industry, even among players already escaping thermal coal. Last month the UK’s largest pension fund, Nest, announced it was divesting from BHP due to its coal interests. In turn BHP is struggling to sell its largest Australian thermal coal mine, Mt Arthur in the Hunter Valley.

Australian coal miners argue that demand for Australian coal will hold up longer than for some competitors because it produces energy more efficiently due to its low ash and moisture content.

BHP is struggling to sell its largest Australian thermal coal mine, Mt Arthur in the Hunter Valley.

BHP is struggling to sell its largest Australian thermal coal mine, Mt Arthur in the Hunter Valley.Credit:Louie Douvis

“Based on our analysis, which includes testing our resilience against the International Energy Agency’s published energy scenarios, we assess our portfolio as being resilient,” a Whitehaven Coal spokeswoman said.

“This reflects informed judgments about the continuing demand for high-quality coal given trends toward electrification and urbanisation in our region and consideration of other factors including reliability, cost-effectiveness and the limitations of renewables as dispatchable fuel sources.”

Last week Swiss-based mining giant Glencore announced it would suspend several coal mines across the Hunter Valley for two weeks in September due to the slump.

Asked during an earning announcement last week if the suspensions might end up being semi-permanent chief executive Ivan Glasenberg said he believed that cuts in production by Australia and Indonesia would stabilise prices, while nations like Pakistan, Bangladesh, India, China would continue to build power stations, shoring up demand.

“Regarding our coal business, it’s still a good business for us,” he said. “It is a cash generator, not as high as it has been in the past with the falling coal prices. However, even at these lower prices, it still generates cash for the company.”

Rory Simington, a lead coal analyst with the global energy consultancy Wood Mackenzie, said in his firm’s view seaborne thermal coal would not reach price heights it enjoyed in 2017, but they would get pretty close post-pandemic. After 2025, he said, the global energy transition would see a long decline begin, but it would be slowed as production eased.

Those concerned about coal’s impact on the climate argue that coal’s future depends not just on supply and demand, but on how long its use will be tolerated by the wider global community.

In an online form hosted by the left-leaning think tank the Australia Institute this week the United Nations chief economist Elliott Harris said that as some countries leapt ahead of others in cutting emissions they might soon start sanctioning the laggards – thermal coal users and producers.

“I think we have to deploy all of the possible instruments to set the right sorts of incentives to make it feasible and remunerative, to invest in clean and renewable energy and less feasible and perhaps downright punitive to invest in fossil fuel,” he said.

“I can tell you that that will happen and it will happen in my lifetime, probably even before I retire.”


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