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$50 billion in new coal mines at risk

Australia could see up to US$50 billion worth of new coal projects abandoned or mothballed, due to changes in China’s demand for the commodity.

A report by Oxford University and the Smith School of Enterprise and the Environment, Stranded Down Under? has found that China represents one-fifth of Australia’s coal exports, and around half of all global coal production. But China is moving to improve its air quality, cut pollution levels and carbon emissions, which could see the country’s long term demand for coal fall dramatically. Coal has been strongly associated with global warming.

That could have a material effect on Australian coal miners, including the likes of BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO), Whitehaven Coal (ASX: WHC) and New Hope Corporation (ASX: NHC) with existing mines.

But the largest risk appears to be on several proposed and under-development coal mines, which have been anticipating rising demand for Chinese imports of coal. The largest is Adani’s Carmichael project, forecast to produce up to 60 million tonnes of coal a year, once in production. Others include MacMines’ China Stone project, Gina Rinehart’s $10 billion Alpha coal project, and Clive Palmer’s $8 billion China First mine.

Should China’s demand for coal drop – and it appears like it is heading that way, those coal projects may end up abandoned or mothballed. For investors in those companies, that would be disastrous. The worry for ordinary Australians is that state governments would be adversely impacted by lower royalty payments, while the federal government would see lower tax collections.

With coal being one of our major exports, the impact of Holden leaving Australia will seem like a low speed bump. What is also concerning is that the report estimates that at least 15% of coal is extracted at a loss – due to low commodity prices. If China’s demand falls further, prices are likely to follow, making it even tougher for the new projects to generate a return on investment.

Foolish takeaway

It seems clear that investing in coal and coal miners is a highly-risky activity, given the future outlook for coal. Foolish investors may want to bypass the sector for now.

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Motley Fool writer/analyst Mike King doesn’t own shares in any company mentioned. You can follow Mike on Twitter @TMFKinga

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