Just a couple of years ago, Peabody Energy Corporation (NYSE:BTU) named an asking price of over $500 million for the Australian Wilkie Creek coal mine it was anxious to sell. In May this year, Peabody sealed a deal to sell the mine to Nathan Tinkler-owned Bentley Resources for a mere $130 million in cash and debt. That deal too has now unravelled because Bentley was reportedly unable to meet its obligations to close the transaction.
In July, Rio Tinto plc (ADR) (NYSE:RIO) sold its Benga coal mine and other projects in Mozambique’s Tete province to a clutch of Indian state-owned mining and metal companies for the rather un-princely sum of $50 million. These assets were acquired by Rio through its disastrous $4 billion acquisition of Riversdale Mining in 2011.
Why are top-notch coal miners and producers rushing for the exits on their investments in coal?
The China factor
[drizzle]China has the exalted position of being the world’s top coal producer, consumer, and importer. It accounted for about half of global coal consumption – a major contributory to energy-related carbon dioxide emissions – also the raison d’être for on-going investments of billions of dollars in coal projects around the world.
However, according to research by Carbon Tracker Initiative (CTI), China’s future coal demand may turn out to be much lower than that assumed by global projects for new coal mines and expansion of existing ones.
A demand analysis by The Institute of Economics and Financial Analysis (IEEFA) shows that Chinese coal demand could top out by 2016, and decline thereafter due to higher utilisation of coal alternatives such as hydro, gas and nuclear power, higher production efficiencies at coal burning utilities and the country’s crackdown on environmental violations.
CTI estimates that the lower Chinese demand could render as much as $112 billion of coal projects redundant, and says coal producers are wrongly assuming that coal demand out of China would be insatiable.
Big mining companies, already facing a steady fall in coal prices since early 2011, may therefore be seeing the writing on the wall.
Low demand of coal means higher cost projects could fail
“In particular it shows that high cost new mines are not economic at today’s prices and are unlikely to generate returns for investors in the future,” says CTI. “Companies most exposed to low coal demand are those developing new projects, focused on the export market.”
CTI projects the size of the seaborne coal market at only 850 million tpa over the next two decades – at this level only projects that have a break-even cost of $75 per tonne could be viable.
“King Coal is becoming King Canute, as the industry struggles to turn back the tide of reducing demand, falling prices and lower earnings,” says Anthony Hobley, CEO, CTI.