Talk of the demise of Australian coal production is largely political, not economic.
The problem for the countries that presently mine and burn coal is that there are currently few low cost alternatives. Most countries in the world today are focused on trying to ensure their citizens have access to electrical power. This is difficult without low cost base load electricity production and at present, coal provides an affordable solution.
As at the end of 2012 there were 75 countries producing coal. These countries ranged from Nepal with production of 17,640 short tons in 2012, through to China with production of 4.017 billion tonnes in the same year.
It’s worth noting that Australia was ranked 5th (after China, the United States, India and Indonesia) with coal production of 463 million tonnes in 2012. While these rankings move around a little over time there is no doubt Australia is still a major player in the market for coal.
Regional coal production
If you focus on regional coal production since 1980 (see chart above), it is clear production in most regions is levelling out or falling except for Asia and Oceania. When you break this group down there are four major producers involved: China, India, Indonesia and Australia, with a large number of other countries producing considerably less. This is evident in the chart below. Coal production has increased in each of these countries since 1980 though the rate of increase since 2000 is greatest for China.
Coal production by China, India, Indonesia and Australia
While Australia’s coal production is important, it is not the largest coal producer. There are a number other countries in the world that produce very large amounts of coal. If Australia were to cease production of its coal there would be an initial increase in world prices. Nevertheless, it is expected that other producers would fill the gap, particularly given the more recent falls in demand for coal.
If the demise of coal was close, you would expect to see it in the share prices of coal producers, as investor expectations shifted on the future of the firms and their ability to produce cash in the future.
The figure below provides standardised total returns for two portfolios of coal companies listed on the Australian Securities Exchange. The figure also includes the S&P/ASX 200 share market index standardised portfolio value for the same period and the AUD price of Australian thermal coal. There were four miners (including BHP Billiton) included in the portfolio early in the 2000s though this quickly expanded to 10 by 2005 through to 21 from 2011.
The portfolio values and the share market index are standardised to a value of A$1.00 at the end of December 1999 and the total returns are compounded over the period to provide an indication of how the value of the coal mining firm portfolios and the share market have changed over the period.
There is a fair spread of different sized coal producers in the portfolio including BHP. Portfolios are graphed both with and without BHP Billiton, though inclusion of BHP Billiton has little impact. Private non-listed companies are not included in the portfolios.
Coal equally weighted portfolios of ASX listed coal producers
Coal company values have been volatile, relative to the Australian share market (S&P/ASX200 index) over the last 15 years, particularly since 2006. Yet, there is also evidence of some stability over the last couple of years, particularly since 2012.
Coal mining company values have fallen since 2011 though they appear to have stabilised by 2013. The overlaid AUD coal price per tonne tells a different story with its highest price recorded late in 2008 followed by price falls for the remainder of the period. These results are not consistent with the collapse of the coal industry. Indeed, the recent stabilisation of coal mining company prices, after the collapse of 2011 suggest a quite different story.
Given these results it seems odd that superannuation funds and large investors might be considering divesting their investments in coal. There is no question that coal mining company share prices have fallen dramatically from the highs of 2011 but it is not altogether clear that that these companies will disappear in the near term given current share prices. And it would be a brave investor that chose to divest its investment in BHP Billiton or Rio Rinto Limited because part of their business involved the extraction of coal.
It would appear that carbon capture and storage has failed to provide the solution to the CO2 emissions generated from burning coal, yet alternative sources of energy are relatively expensive at present. Governments can change the relative cost of coal through carbon markets, carbon taxes or direct legislation. Yet the global reality for coal appears to be reflected in coal mining share prices. The economics suggest it is here to stay for some time yet.