Coal: before the flood

The flood was stopped by the actions of a boy. Spotting a hole in the levee, he plugged it with his finger until help arrived. Had there been more than one hole, or no boy, or no help, disaster would have ensued.

So it is with thermal coal (the sort used in power plants). There are holes in the market. China alone has several. The country’s leaders are eager to shift away from energy-intensive investment, towards consumption. Fixed-asset investment growth has halved to 16 per cent from a 2009 high of 33 per cent.

The US is not much better for coal miners, given that shale gas is cheap. According to a recent Carbon Tracker Initiative (CTI) report, a decline in coal-fired power plant generation has resulted in a drop in US coal consumption of 17 per cent between 2008 and 2013. The CTI has identified $448bn scheduled for capital expansion of thermal coal production worldwide (outside China) by 2025 – $112bn of which would be uneconomic if forecasts of flat demand are correct.

Thus the boy is pulling his finger out. The question is how large the flood will be. Shares in Peabody Energy, the largest US coal producer, change hands for seven times the cash flow it generated over the past 12 months – and only twice the cash flow of 2011. This may price in weak demand that, with coal accounting for 40 per cent of global energy generation, will not disappear entirely any time soon. But a more diversified miner, BHP Billiton, also trades at seven times. That makes Peabody look much less cheap.

Neither will governments come to the rescue. Last year China invested more in clean energy than the US or the EU. Last week, China banned some cities from burning coal with high ash and sulphur content. In April, the US Environmental Protection Agency won the right to enforce new air standards. This may lead to 60,000 megawatts of coal-fired production being retired – about a fifth of the US total – by 2020.

Capitulation by coal companies may come first. This week Coal India, one of the world’s most inefficient miners, announced a $1.2bn investment in solar power.

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