Greg Boyce, CEO of Peabody Energy (BTU), is reported by the Australian Financial Review to believe that "coal will remain the world's leading fuel for the next decade and perhaps longer if the sector can successfully fight off a symbolic clean energy push". He thinks that the drive against coal is only symbolic and results from poor knowledge in the investment community of the true situation. He confidently predicts that fossil fuels will continue to provide 80% of energy for the rest of our lifetimes and beyond.
This assumes that the drive for low carbon energy solutions is a "fad" that will dissipate when people come to their senses.
Here are 5 reasons why the demise of coal is not a "fad" resulting from a "symbolic clean energy push"… these are substantial themes that are impacting on coal as a product.
1. Valuing coal businesses: It has been suggested that coal companies should be valued not on their current capitalizations, but instead on the valuation of their resources, based on recent acquisitions. So what is the evidence based on current valuations? Rio Tinto (NYSE:RIO) has recently effectively sold out of coal by exiting its Mozambique holdings (Riversdale Mining) in July 2014 for $58 million ($3 billion invested). This looks like a write off of a major coal asset.
The climate science indicates that 60-80% of current fossil fuel assets must stay in the ground if the planet is to remain liveable (ie, less than 2C temperature increase). If this metric is used, then all coal assets (which are the fossil fuels most targeted for exit) are dramatically overvalued.
2. Coal as a stranded asset: Peabody has heavy exposure to Australian coal assets. While the Australian Government is doing all it can to prolong the values of coal (and gas) assets by axing carbon pricing and providing incentives for major coal and gas developments to proceed, there is a question mark as to whether these assets (especially coal) will obtain financing. Included in these financing challenges is the construction of expanded coal port facilities in the Great Barrier Reef. Any threat to such an iconic global asset of course attracts attention.
A number of campaigns are targeting coal in the same way as the tobacco industry was targeted previously as an asset class that should be avoided. 350.org has targeted key investment groups. The Asset Owners Disclosure Project emphasizes the risks posed by retirement savings portfolios that are overweight for fossil fuel investments. Stanford University ceased to make investment in coal companies recently. The World Council of Churches (representing 500 million Christians) recently announced it will cease all investment in fossil fuels.
3. Coal needed for the developing world? A new theme promoted by the coal industry in general, and Peabody Energy in particular, is that coal is the way that the developing world will escape from energy poverty.
What about coal for developing countries? Presumably this means mostly China and India.
In China pollution is so bad as a result of burning coal, that Beijing is outlawing all use of coal by 2020 and it is considering restricting coal use in other provinces including major coal burning Shandong. This, along with an emerging national carbon pricing system, is consistent with China capping coal use by 2020 and declining thereafter.
Just as Fukushima changed the landscape for nuclear, coal pollution in China is having a dramatic impact.
The new Government in India has doubled the tax on imported coal and is aggressively developing solar technology both at scale and also to provide basic electricity supply (light, mobile phone charging, cooking, TV) for 300 million people currently with no source of electricity…by 2019!
So while coal has been significant in developing China, the evidence that coal will continue to be used to drive development in emerging economies is looking shaky. If Greg Boyce has evidence to back up the dramatic expansion of coal imports by China indicated on the Peabody Energy website, it seems worthwhile for him to reveal it. China has got the brakes on. In fact a recent report indicates that China's coal use for the first half of 2014 has declined.
A truly symbolic act in the energy space is Indian PM Modi's goal to rapidly empower the 300 million poor in his country using a simple solar power solution.
4. Threats to coal. Where are the threats to fossil fuels? Most people think of solar and wind power as the key threats and examples of this abound. In South Australia in July of this year wind and solar provided ~50% of total electricity used; in Germany renewable energy provided 31% of electricity in the first half of 2014. These are big numbers and they are being reproduced around the world. Some form of energy generation needs to disappear and the first cab off the rank is coal.
However solar and wind are not the only threats. In a recent Citigroup report "Energy 2020: The Revolution Will Not be Televised as Disruptors Multiply", another threat to fossil fuels is reduction in power use through energy efficiency and demand management. The players, including Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL), are cashed up and ready to play.
5. The real cost of coal. Worse still the world is waking up to the real costs of coal. Christine Lagarde IMF Managing Director said recently at the launch of an IMF book "Promoting Responsible Energy Pricing"
… energy seems to be pervasively mispriced at present based on IMF's assessment. Take coal for example. This is about the dirtiest of all fuels, yet almost no country imposes meaningful taxes on its use. Our work suggests that to reflect the carbon damages alone, a reasonably-scaled charge would amount, on average, to around two-thirds of the current world price of coal.
One can't help but think that the coal industry is trying to shut its eyes to these issues as they threaten the very fabric of their businesses, and not just from one angle.
I suggest anyone contemplating investment in Peabody Energy in particular, and the coal industry in general, needs to think carefully as to whether the current negativity about coal is a result of a temporary glut and "fad" for renewables, or whether the world is seriously on the path to a low carbon future. I suggest the latter and if so, don't expect coal prices to develop an upward trajectory any time soon.
In the quirky Australian film "The Castle" one of the characters would say "you're dreaming" when someone suggested something that did not make sense. I suggest that Greg Boyce is "dreaming" if he really thinks the objection to coal use is "symbolic" (whatever that means).
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Author has a small investment in ASX listed wind company Infigen Energy (IFN).