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Is there any future in coal?

From the big boys like BHP Billiton (ASX: BHP) who shift millions of tonnes a year, to the niche miners like Bathurst Resources (ASX: BTU), coal is a major part of the Australian resource industry both as an export and as a key energy source.

In 2011 coal was the country’s largest energy export earner, extracting and shipping off $43.7 billion of the black stuff to world markets. However it is also the resource with the most question marks over its future.

On one hand, the demand for coal in heating and electricity generation is huge – it provides 30.3% of the world’s primary energy needs. On the other, excess supply, alternative energies and international emission standards place the future viability of the industry in doubt.

The prices for coal have tumbled this year on strong supply and fears of lower economic growth from China. Steel production largely depends on coal, gobbling up 13% of the worlds ‘hard’ coal produced. Slower Chinese growth means less demand for steel and less demand for coal.

This could be nothing more than a cyclical slump; however one report has labelled Australia’s exposure to coal a “carbon bomb”, creating “a speculative bubble of climate denial”.  The report, by organisation Carbon Tracker, speculates that if world governments reach their agreement to take a stand on climate change and implement ‘carbon budgets’, Australia’s coal reserves could become worthless.

The report’s sentiments are backed by Citi Group, which believes such a situation could arise causing countries to switch demand to cleaner burning fuels like natural gas, or renewable energy sources. This would put at serious risk coal assets held by the likes of BHP, Rio Tinto (ASX: RIO), and New Hope Corporation Limited (ASX: NHC).

In the medium term, coal exports are forecast to grow strongly in volume, but not in value. Data from the Department of Resources, Energy and Tourism indicate volumes of coal exports will grow 27% between 2013 and 2017, but the value of the exports will only rise 6%.

Foolish takeaway

The research presents a bleak future for a resource that has been used by mankind for hundreds of years. The issues facing the industry appear to be more than just cyclical, and long-term the situation could lead to a dead-end from an investment perspective. Investors may have already caught on, with shares in New Hope down 8.41% for the last 12 months, while the S&P/ASX All Ordinaries Index (Index: ^AXAO) (ASX: XAO) is up 25%.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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