For Peabody Energy It's 'Same Old, Same Old' But Outlook For Coal Gets More Challenging

| About: Peabody Energy (BTU)
This article is now exclusive for PRO subscribers.

Summary

IEA continues to predict recovery of coal exports; the facts about China, India & Japan say otherwise.

Large Indian coal companies investing in solar.

Sentiment towards coal changing in Australia; is the switch to solar happening?

More coal power plant closures in the US : 25 by 2020 in Michigan and more to follow by 2030.

1.5C being talked about as a critical temperature rise: big implications for coal use.

Things are getting surreal. This week an IEA report projected dramatic expansion of coal in South East Asia to 2040, at a time when key Asian countries China, India and Japan are all decreasing coal imports (down 23%, 6% and 4% respectively for the 6 months April-September 2015 compared to 2014). These are the facts, so are projections by the IEA credible? The IEA projections are vitally important for Peabody Energy's (NYSE:BTU) Australian coal business. My question is : "Why would South East Asian countries adopt technologies that their leading Asian counterparts are abandoning?" If coal isn't competing with solar in India, why would Indonesia, Thailand, Singapore, Philippines, Malaysia, Vietnam, Myanmar, Brunei, Darussalam, Cambodia and Laos be different? The IEA has been consistently on the back foot about the development of renewable energy, using cost estimates for years ahead that are wrong (too expensive) at the time of release of their reports. In previous reports, to justify their coal recovery predictions they first used China as the driver for coal exports, then when it became clear that China is addressing coal use and reducing imports, India became the driver for coal exports. BTU continues to claim that China and India are growing markets for coal imports : "In the coming years, coal demand is projected to expand by 450 million tonnes, with China and India responsible for nearly 80% of this growth" (BTU website).

Now it seems the IEA has retreated to South East Asia, where admittedly these countries are late to join the transition to renewable energy. But will they still be laggards in 2040? I don't think so.

The IEA report is big on projections, but fails to take account of what is actually happening on the ground. They have coal expanding at the fastest rate of energy fuels out to 2040. I find this scarcely believable even on the most basic metrics. Do the authors assume that the cost of solar is going to stop decreasing? The IEA has contribution by renewables DECREASING from 26% to 21% by 2040! … and fossil fuel use RISING from 74% to 78%, with coal rising from 32% to 50%. I find this bizarre in a just released report. Are they paying attention to the need to reduce CO2 emissions? If the rest of the world (driven by China, US, India) reduces its fossil fuel consumption, why will dramatic expansion of coal consumption by these 11 countries be tolerated?

Looking at recent literature on these countries, it is clear that the ground is being laid for a switch to renewables. Perhaps a straw in the wind is the recent decision by Engie (Formerly GDF Suez) to cease involvement in new coal plant construction, sale of coal assets and focus on renewable energy. Engie has significant operations throughout the world, including India, South Africa and interest in China, but of note here ENGIE Energy Asia-Pacific has major involvement in South East Asia with plants in Indonesia, Singapore, Thailand and interest in developing energy solutions in the Philippines and Vietnam. A change in focus from coal to renewable energy is highly significant for this major player and also of relevance to future energy developments in South East Asia. Engie is not exiting the energy space in South East Asia, but they are exiting coal in particular.

Large Indian coal companies investing in solar

India, the country that the IEA had once said will save coal companies by expanding its coal use, is not playing by the IEA book. Coal India Limited, the world's biggest coal company wants to reduce its carbon footprint by building 1GW of solar PV in India, starting with 250MW in Madhya Pradesh that will be completed within 12 months. The company is scouting for locations for the remaining 750 MW of solar projects. Solar build is a much faster proposition than building a coal plant and they are non-polluting.

Adani is another huge Indian coal company that is going down the solar path with plans to build 10GW solar PV in a JV in Rajasthan. This is just a part of planned 25GW solar build in Rajasthan.

These developments support the intention of the Indian Government to make the country a renewable energy powerhouse with 100GW new solar PV and 75 GW new wind power by 2022.

The coal industry and switch to solar in Australia

Australia has been a poster child for BTU's "coal is good for humanity" campaign. Australia has just escaped from a 2 year period, when PM Abbott's chief business advisor believed that global cooling was a serious threat. Many of the Abbott government policies were about ideology, and evidence-based decision making didn't get a look in. New PM Turnbull accepts evidence as a basis for decision making. Whereas the Abbott government actively supported Adani's massive coal plans in the Galilee Basin, with talk of making available funds from a $5 billion northern development fund to help build an essential rail link, new Resources and Energy Minister Frydenberg is much more measured, saying last week that the Adani project is "…a commercial operation. It needs to stand on its own two feet. It (funding) won't be a priority for the Commonwealth."

In a bizarre twist, news out of Australia yesterday suggests that Adani is investigating a major solar PV project in Queensland's coal rich Bowen Basin. This is the Australian State where it is failing to succeed in developing the major coal project.

There seems a bit of a solar gold rush starting to happen in Queensland, with 1.2GW combined solar PV (600MW) and wind (600MW) being proposed to provide up to 80% of local electricity demand at a capacity factor of 70% and at rates cheaper than new coal build.

In another twist, plans are being developed to build a 150 MW solar PV project in connection with a pumped hydro facility at an old Queensland gold mine. I suspect that there are a lot of old mines that might be available for pumped hydro projects. Indeed in the US, the 1.3GW Californian Eagle Mountain pumped hydro project is moving closer to being realised.

These kinds of development show how quickly and dramatically things are changing. Not only are major solar PV projects planned, but huge pumped hydro is being considered as a storage option for these big solar projects. And this is happening in what was proposed to become one of the world's biggest coal developments. No doubt the Great Barrier Reef, through which the coal would have been shipped, is relieved.

More coal power closures in the US

Michigan, a state heavily dependent on coal power, has announced closure of 25 coal plants by 2020 and more will almost certainly close by 2030. For example, DTE has 3 plants planned for retirement by 2020, leaving 15 plants operational, but only 1 of those plants is likely to remain in operation by 2030.

This is what happens when plants get old and pollution requirements are tightened. The absence of new plans to build coal fired plants across the country is a clear signal for the end of the thermal coal industry in the US.

The science is talking about 1.5 - 2.0C as the critical temperature rise

In the leadup to the climate meeting in Paris there is now increasing mention of 1.5C temperature rise where formerly the focus was on 2C, noting that even if all current emissions reduction plans are implemented, the world is still heading for 2.7C temperature rise. Mention of 1.5C rather than 2C temperature rise might be overlooked by most people, but it is a very big deal for the fossil fuel industry. To achieve just a 1.5C rise, really dramatic emissions reductions will be needed. The reason for the emergence of discussion around 1.5C is that the latest science is saying that this (not 2C) may be the increase that we need to stay below to avoid climate catastrophe.

An article in the leading science journal Nature published today indicates that unstoppable sea level rise, due to melt of the Antarctic ice shelf, is at stake. The good news is this rise can be prevented, but urgent action on emissions reductions is needed. If sea level rises by 1 meter this would mean relocation of 100's of millions of people and most of the world's financial centers.

BTU share price

After a brief period of euphoria after the reverse stock split, and a number of articles urging investment in BTU as the "recovery is happening", the share price decline has resumed. BTU remains a day traders dream, down 6.24% yesterday and up 2.47% today. While the share price is heading towards $1 on the pre-reverse split pricing, at $21.57 there is a lot of room for shorters to play.

Conclusion

Essentially all positive stories about BTU, are based on coal being at the bottom of a "business as usual cycle" from which it will exit, most likely due to increase in the price of gas.

I argue that there are many different things happening, which collectively mean that coal is in long term and irreversible decline. I'm increasingly convinced that there are two key factors which are most damaging to the long term future of coal i) the rise of investment in and increased capacity of renewables (and energy storage) and ii) likely major action on emissions reductions (climate change), which will crystallize at the Paris summit.

Here I have reported new developments in both of these areas, which reinforce my view that coal is in trouble. I continue to suggest that, day traders aside, long term investors think very carefully before investing in BTU.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.