China Coal Peak Imminent Makes Coal Risky Investment: Study

Chinese demand for coal may peak as soon as this year, hurting a world market already suffering from oversupply and low profits, the Carbon Tracker Initiative said.

Investments in coal assets may be hit by falling costs for renewable energies and tighter regulation to combat global warming, said the group, which promotes the idea that the world can’t burn all the fossil fuels it’s investing in while meeting its climate goals.

“There are a host of signals that Chinese demand for coal is close to peaking which will cause a seismic shift in the market,” Anthony Hobley, chief executive officer, wrote in a report released today. “This is potentially a risky business for investors.”

The report comes as China, both the largest market for coal and the worst carbon-dioxide emitter, is seeking to cut output at the nation’s 14 largest producers after prices slumped amid efforts to moderate economic growth and fight pollution. China seeks to decouple CO2 emissions from growth and is studying when emissions may peak, Xie Zhenhua, vice chairman of the National Development and Reform Commission, said Sept. 19.

U.K. coal-fired power generation is set to drop 84 percent by 2023 as all but three plants burning the fuel are forecast to close under European Union environmental rules, according to National Grid. The Stowe Global Coal Index, which includes the industry’s main operators, lost 13 percent in the past year.

“In the pure coal sector there is only one trend; downward,” said the report by Carbon Tracker, a London-based nonprofit organization that researches the potential effects of climate change and policy on the world’s capital markets. “Coal prices are down, returns are down, share prices are down.”

Reducing Imports

Chinese demand for thermal coal will peak anytime from 2014 to 2016, according to the report. The nation’s plan to reduce imports will curb prices and asset values for export mines in the U.S., Australia, Indonesia and South Africa, according to a joint statement by CTI and Energy Transition Advisors.

For about half of potential thermal coal-export production in 2014, prices fail to cover variable costs, the report said. Producers may fail to get the price recovery they are seeking, it said.

“We see a low demand scenario leading to a $75/ton peak break-even price for profitable new development in seaborne markets,” Mark Fulton, founder of Energy Transition Advisors, said in the statement. “Companies and investors need to understand their exposure to projects higher up the cost curve.”

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