Study suggests US and China coal curbs could make future investments in sector risky

(Pic: Flickr/JHOON)

By Ed King

China’s demand for coal is likely to peak by 2020, according to new analysis from ratings agency Standard & Poor’s.

It bases the conclusions on the country’s GDP increasing by 7.4% and 7.2% in 2014 and 2015, with coal demand falling to single figures later this decade.

“This is due to the slow shift of the economy toward consumption from capital investments; lower GDP growth; and the Chinese government’s increasing focus on tightening emission standards and moving to more renewable energy sources,” it says.

“Other tangible factors include the low level of fresh water and lack of long-term quality coal resources.”

Shale gas could be a “game changer” says the agency, but significant pipeline infrastructure needs to be installed before the country’s reserves can be fully exploited.

China is the world’s largest coal consumer and biggest source of greenhouse gas emissions.

In a report published on Tuesday with the London-based Carbon Tracker NGO, Standard & Poor also warns coal producers that new green policies aimed at addressing climate change will hit growth.

“As governments globally seek to reduce their CO2 emissions, it looks increasingly likely that ‘King Coal’ will lose its crown,” says the report.

“A significant decline in coal production and consumption globally is becoming a much more realistic concept.”

Coal companies in Europe are likely to be hit hardest, with the report dismissing any short term impacts on coal mining in Indonesia, Vietnam, and Australia.

It says the future of US coal will likely hinge on domestic natural gas prices, boosted by President Obama’s recent move to cap emissions from carbon polluting power stations 30% by 2030 on 2005 levels.

And the agency suggests some coal producers may suffer from the “carbon bubble”, where shifts in international climate laws make their reserves unburnable.

It adds: “The global coal market is in the doldrums, owing to excess supply and fundamental shifts in the US energy mix toward gas and new coal mining projects.

“Over the long term, coal miners may experience stranded assets as a result of carbon constraints.”

In a statement Standard & Poor’s credit analyst Michael Wilkins says “numerous factors and their timing” are likely to affect the future of coal as a major energy source.

“Carbon pricing through either taxation or cap and trade emission reduction schemes is among them,” he says.

“We believe new initiatives, such as those made recently by the US and China may flatten the growth in coal demand over the coming years.”

Adeline Diab, head of responsible investments at Aviva Investors, says the report should alert potential fund managers over the long term risks linked to coal.

“The dynamics and change of the coal market is accelerating. However, markets are currently not pricing these risks even though they are material to long-term capex plans and current market values.”