As the new-look federal government umms-and-ahhs its way through a defence of new coal mines, the new Prime Minister Turnbull should look to President Obama.
You see, the American President recently gave a landmark speech to announce the ditching of another great white elephant, the Keystone XL pipeline. He left no doubt that the project was not economically attractive, arguing, "The pipeline would not make a meaningful long-term contribution to our economy."
However, as a politician, and not an investment banker, President Obama knows that returns to society aren't always measured with a $ symbol. Indeed, he also gave a nod to environmental stewardship as another reason for rejecting the pipeline. "America is now a global leader when it comes to taking serious action to fight climate change," he said, "And frankly, approving this project would have undercut that global leadership."
A long-term focus on the environmental and social returns of investing in new coal mines is startlingly absent from our own leader's rhetoric.
A few facts for the new PM
One, your demand estimates are wonky. As the Australian Financial Review reported last week, the International Energy Agency (IEA) is "set to revise down coal demand forecasts." And in case you're thinking this is a one-off misjudgment by the IEA, let me assure you, it's not.
In every World Energy Outlook report since 2000, the research body has underestimated the deployment of renewables. The fact that the IEA consistently underestimates renewables should have any decent analyst questioning the accuracy of its future predictions.
Two, the business case for the new coal mines relies on unrealistic demand growth for coal. Year to date, coal imports to China are down nearly 30% in volume — and worse when it comes to price.
It shouldn't surprise anyone that when banks refuse to fund large projects like the coal export terminal at Abbot point, there's hard-nosed financial reckoning, as well as concern for the environment, at play. It's likely that some Australian coal companies will go bankrupt in coming years, and it's a bank's job to try to avoid the fallout.
Over in the US, it's already happening. Alpha Natural Resources, the second biggest US coal company filed for bankruptcy protection in August this year. The largest coal company in the world, Peabody Energy Corporation, has seen its share price fall over 90% in the last year, reflecting the risks posed by a falling coal price. Some analysts believe it too will eventually file for bankruptcy.
Now, it may seem obvious to the average Australian, but the political class seem to struggle with basic supply and demand. Apparently, here in Australia, we think what the world needs right now is massive new coal mines, despite the fact that existing coal companies can barely turn a profit. Our Australian approach to the coal glut can be summarised as follows: we're in a hole, so dig new holes.
No laughing matter
It would be laughable were the stakes not so high. Unfortunately, the various new coal mines proposed for Australia threaten one of our most important resources: water. Take for, example the mine proposed by Hume Coal, slated for the NSW Southern Highlands. It would sit less than 2 hours from Sydney, where, according to an independent report, "the detrimental impacts of coal mining on aquifer productivity would be substantial."
And of course, the miners are predicting higher coal prices. The Monthly recently covered the Hume Coal situation, revealing that the moderator at a community engagement meeting said, "we expect that by the time this mine comes on stream, the coal price will have recovered significantly."
Foolish takeaway
Australia is risking a lot on the hope that coal prices go up. Some proposals would risk damaging tourism on the Great Barrier Reef, while others would (literally) undermine prime farmland or result in lower water tables. As an investment banker, Malcolm Turnbull might have focussed on closing the deal, but as Prime Minister he should listen to President Obama when he points out, "Our biggest and most successful businesses are going all-in on clean energy".
