Tinkler's Coal Dream Looks Fanciful

Chinese demand has peaked and India won't emerge as the industry's savior.

Nathan Tinkler says there are no prizes in giving up on coal. He's wrong. Waking up from a nightmare has to be its own reward.

King Coal's Fall

Thermal coal prices have more than halved in four years

Source: GlobalCOAL

Coal has been nothing but a dream turned bad for the former Australian electrician who made a fortune in the black stuff only to lose most of it as his debt-fueled empire crumbled amid low prices. Now he says the industry, which is facing long-term existential threats from both natural gas and solar, is far from doomed. Shareholders in Australian Pacific Coal already have their money where their CEO's mouth is: the company last month bought a stake in a New South Wales coal venture from Anglo American for $36 million.

Could Tinkler be onto something more substantial than wishful thinking? It's hard to give the ex-billionaire the benefit of the doubt. For one, Chinese demand has peaked, and after years of hand wringing, the world has acted decisively on carbon emissions. The only remaining large bet is India, which still needs a lot more power in the long run, and coal remains the cheapest way to produce it. Even then, analysts at the International Energy Agency aren't exactly penciling in India as the next China. According to IEA forecasts, if China doesn't go back to its coal-guzzling ways, global coal import demand might stay severely depressed until at least the end of this decade:

That Sinking Feeling

The IEA's forecasts for global seaborne imports of thermal coal have been revised lower

Source: International Energy Agency

Note: IEA provides only alternate-year forecasts; dotted lines indicate missing years in data

There are at least four reasons why India won't be the coal industry's savior. First, the country isn't exactly in the midst of a factory expansion that can be expected to yield a big surge in power demand in the near term. During the last quarter, new project announcements collapsed by 74 percent from a year earlier.

Drowning in Coal

India's power plants are sitting on record stocks of thermal coal

Source: India's Central Electricity Authority

Second, India has enough coal of its own, both below the ground and above it. Bloomberg Intelligence estimates that stockpiles of thermal coal with Indian power producers jumped 15 percent, or 4.1 million metric tons, in December to a record high. Meanwhile, coal imports between April and December fell 15 percent from a year earlier. 

Third, as my colleague David Fickling wrote in early December, natural gas is going all out to sink coal. Qatar's RasGas gave its Indian buyer Petronet LNG a welcome New Year's gift by dropping the current gas price to about $6 to $7 per million British thermal units from $13 earlier. From a climate perspective, the 523 grams of carbon dioxide emission for each kilowatt-hour at gas-based plants is a vast improvement on 1,205 grams at coal-fired ones.  

Finally, divining India's future coal requirement based on China's past demand growth is just fanciful. India is witnessing a solar revolution that could quite remarkably lessen its dependence on coal. The price at which some of the solar producers have recently promised to sell electricity to utilities has crashed to a record low 4.63 rupees ($0.07) per kilowatt hour. The government, worried about hazardous pollution levels in major cities, is enhancing subsidies for rooftop solar units. KPMG estimates that by 2025, the cost of producing solar power will fall to just 3.59 rupees, at which price coal-fired power plants might suffer a serious threat to their competitiveness.

Australian coal suppliers might be able to garner some cost advantage over their Indonesian rivals, but unless the current solar boom in India turns out to be a gigantic bubble, coal may not have much of a leg to stand on. Tinkler's comeback dream might remain just that.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andy Mukherjee in Singapore at amukherjee@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net

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