European broking house Kepler Chevreux says the coal industry could be deprived of $4.9 trillion in revenues if the world acts to reduce carbon emissions and other forms of pollution. RenewEconomy has covered the report which was overseen by former Deutche Bank carbon analyst Mark Lewis. While the broker's report covers the impact on fossil fuels generally, I'm focussed on coal, because you don't need to be worried about anthropogenic global warming to see the harm it causes, and I think it is far less useful than oil or gas. Indeed, air pollution caused partly by burning coal is causing major problems in China, and it is one of the main reasons that the government there is looking to close inefficient old plants.
Closer to home, the residents of Morwell, who suffered next to a burning coal mine for weeks, would presumably be aware of the disadvantages of having a mine so close, even if it does provide the town with jobs. The Victorian Chief Health Officer, Rosemary Lester, has just announced a study into the health impacts of the fire, as demanded by firefighters and town residents alike. I wonder how much it cost taxpayers to have the firefighters there for weeks? At least the study will give an idea of the health costs.
Since I wrote this article, shares in Whitehaven Coal Limited (ASX:WHC) are down about 20%, although if you ask me, the company remains overvalued. Indeed, investors should be questioning whether Whitehaven Coal is capable of delivering volume from its Maules Creek expansion on time. Last year the company was "very confident" that first coal would be delivered by early 2015. Yet the mine is beset by protests, with over 100 recently appearing before court, having submitted to arrest to mark their opposition to the mine. According to The Australian, originally, "the project was scheduled to be in production by the end of [2012] and exporting coal at the start of 2013." Less than a year ago, CEO Paul Flynn said: "We are expecting to rail first coal on October 1, 2014." These delays are arguably a tangible result of protestors' actions.
Management of mining companies such as BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), are keen to talk their book. Quite recently, Rio's head of energy said that: "Australians should recognise that coal will remain an important energy source for decades." While coal fired power generation will be around for the rest of my life, it's quite likely that it will peak, then diminish in profligacy. There are not great economic incentives to build new power plants unless there is a ready source of coal nearby, even without considering negative externalities. The chart below, taken from Europe's Electric Shock: Lessons for Australia, demonstrates the declining profitability of coal generators in Germany.
Foolish takeaway
Hopeful biotechs will tell you their technology is the new "gold standard," newspapers will tell you they have an "online strategy" and mining companies will tell you commodity prices are going up. However, it is far better to attempt to derive this sort of information from a source that does not have money riding on the call. Financial analysts and academics tend to be better sources of information than individual companies or industry bodies, because they are more incentivised to get it right. BHP and Rio undoubtedly have a lot going for them as businesses, but I remain sceptical of their enthusiasm for coal mines. After all, I believe no-one wants to live next to a coal fired power plant, when you could have a solar field instead.
If I'm wrong about that, then why are developed nations closing their coal power plants and putting up solar panels instead? The thesis for growing coal demand is that developing nations don't do what's best for their citizens in the long term, and choose to become beholden to coal imports. Keep in mind, however, that Kepler Chevreux sell Sustainable Bonds, so they have an interest in the world moving towards renewable energy and away from coal mining. But even if they have exaggerated the situation, coal pure-plays like Whitehaven and Yancoal Australia Ltd (ASX: YAL) remain unattractive investments in my book. Investors should look elsewhere: there are certainly better options.
