Collapsing share prices of US coal hold warning for BC and Alberta carbon bubbles
Share prices of major coal mining companies in the United States have collapsed in the last two years. Investors have lost billions. The lack of any solution to the high levels of climate pollution from coal burning is dimming the industry prospects for a growing number of investors.
Amazingly this gutting of market capitalization over the last two years has happened while US coal production fell just 6%. It's not today's relatively small decline that has spooked investors. Instead it is a rapid change in what the future looks like for American coal. Just a few years ago the accepted future was one of decades of growth. This has quickly morphed in many investors' minds into a scenario of long term decline. That popping sound is not from champagne corks anymore.
As Deutsche Bank summed up, US coal burning has become a "dead man walkin' ":
"Banks won’t finance them. Insurance companies won’t insure them. The EPA is coming after them…And the economics to make it clean don’t work."
As my chart below shows, just four companies accounted for over half the coal mined in the USA. All four have seen their stock price fall between 26% and 77% over the last two years. Other large US coal mining companies have seen stock prices fall by 90% or more.
Chart notes: Click chart to view larger. Column width shows how much coal that company mined last year. Columns height represent the company share price in October 2011. Filled column height is the relative size of the company share price in October 2013 compared to two years ago. Only public companies that mined more than half a percent of US coal production last year are listed. Production data: US EIA.
Down 56% : Peabody Coal mines more coal in US than any other company. Its share price has been cut in half in two years. It is down 75% from its high in 2008. The coal it mined last year produced 370 million tonnes of CO2 (MtCO2) when burned. That is more than the emissions of the 120 least climate polluting nations -- combined.
Down 77% : Arch Coal, the second biggest miner of coal in America, saw its share price fall 77% in two years. As Sightline reported last month the bond rating agency Moody downgraded their debt rating with a warning: "the potential for material recovery in demand and pricing is limited." Morgan Stanley followed up by downgrading the stock, leading to yet another big sell off.
Down 73% : Alpha Natural Resources is America's third largest producer of coal. Its stock lost nearly three quarters of its value in just two years. More dramatically its share price has fallen 93% from its peak in 2008.
Down 26% : Cloud Peak Energy is America's fourth largest producer of coal. If you invested in this stock you would have lost a quarter of your money over the last two years. More trouble is on the horizon according to another Sightline report out this week. It shows that Cloud Peak is now reporting a loss of one dollar on every tonne of coal it is shipping to Asia.
These top four US coal miners produced 520 million tonnes of coal last year. Burning that coal emitted over 1,000 MtCO2. That is nearly double emissions from Canada, the world's ninth worst climate polluting nation.
Down 99% : Patriot Coal is a spin-off company that Peabody and Arch filled with their unionized coal mines. In 2011 its stock was as high as $25. Today it is eight cents. Along the way a bitter fight has filled the courts as the company tries to discard some of its pension and health care liabilities to its employees. The coal company argues that the outlook for the industry is so bleak that it can't afford to mine coal if it has to pay the level of benefits the industry used to be able to support.
CO2's long shadow spooking investors
The future for US coal, and for the investors/pensions holding the coal-dependent stocks, is growing bleaker because of the pollution that coal causes. New coal infrastructure investments can tie up hundreds of millions, or billions, of dollars and take decades to pay off. Increasingly the companies, banks, governments and utilities weighing these decisions are saying "no" to the long-term risk.
Just yesterday one of the largest coal burning utilities in America, the Tennessee Valley Authority (TVA), announced it was going to cut its coal fleet in half. Two years ago TVA burned coal for over 50% of its electricity production. Now it is 40%. Their new plan will cut that to 20%. This decision was made despite the intense lobbying to keep them open by one of America's most powerful politicians, U.S. Senate minority leader Mitch McConnell. The reason for the retreat from coal:
"Our generating fleet has to look different than it has in the past," Bill Johnson, TVA’s chief executive officer, told the board. "This will support our focus on cleaner energy and bring additional, necessary balance into our portfolio."
Here are just a few of the big uncertainties that investors are looking at when deciding whether to make any long-term bets on coal in America:
1: INCREASING EPA REGULATIONS -- The US Supreme Court, in a land mark ruling, said the Environmental Protection Agency (EPA) had the authority to regulate climate pollution. Since then the EPA has been developing a series of regulations that will reduce a number of different pollutants from coal plants. Having to clean up pollution costs more money that dumping it for free. This is increasing the cost of burning coal. The need to reduce toxic mercury and sulphur pollution has already lead to multiple coal plants shutting down. Even more expensive will be reducing CO2 pollution as required under new regulations being developed now. Canada already has passed CO2 regulations for future coal plants.
2: CLEAN COAL TOO EXPENSIVE – For years the coal industry has been saying their future will be climate clean because they will capture CO2 and store it. This would allow them to meet proposed pollution regulations. But this technology is proving to be far too expensive. Many projects have been abandoned. The International Energy Agency now predicts just 1% of power plants will use this technology by 2035. One percent. The marketplace is saying "no" to carbon capture and storage as an economically viable solution to coal's climate pollution woes.
3: CHEAPER COMPETITION – Coal has always had one major trump card: it has been cheaper than the alternative. However natural gas in the United States has become so cheap that it has displaced a lot of coal already. And both wind and solar have fallen so dramatically in price that they are now cheaper than new coal power in some regions. Also lots of energy efficiency and conservation projects are proving cheaper than the energy itself. This has lead to a decline in electricity demand in many US coal burning electricity markets.
As banking giant Citi forecast in a major new report, "Energy Darwinism", the global energy mix is shifting far more rapidly than experts expected just a couple years ago. This shift has been led by "alarmingly" rapid price drops in solar which they expect to continue. Wind is even cheaper and its cost too continues to decline though at a slower rate. At the same time fossil fuel alternatives are becoming more expensive. The trend lines strongly favour renewables over coal. Another banking giant UBS reports that solar is becoming so cheap that its expansion is "unstoppable" even without subsidies. They predict that coal power in many regions will quickly shift from dominant base load provider to a more niche role of filling in the gaps.
4: UNBURNABLE CARBON – More and more of the world's major institutions are sounding the alarm that the vast majority of the world's proven fossil fuel reserves have to stay in the ground for humanity to preserve a safe climate system. In the last two years this includes the United Nations, the International Energy Agency, the World Bank, the International Monetary Fund, and international financial giants like Citi, HSBC, and UBC.
Major investors are getting worried. The American Securities Exchange Commission just required companies to report their carbon risk to investors. A huge group of pension funds with assets of $3 trillion have demanded top coal companies explain what happens with their coal assets as the world acts to stop a climate catastrophe from unfolding. Large investor groups are demanding that fossil fuel companies stop exploring for more fossil fuel resources since they aren't going to be able to burn everything they already have. Investors are demanding the money instead.
As Al Gore warns, the world is on the brink of the "largest bubble ever" in global finance because there are trillions of dollars of fossil fuel reserves that can't be burned. The share prices of the companies that hold these reserves will fall dramatically as investors realize just which ones are likely to become stranded assets. The companies with share prices most at risk are the ones with the most climate polluting reserves like coal and dirty oil such as the Alberta tar sands.
5: CLIMATE ACTIVISTS – By far the top target of US climate activists has been coal burning. This effort has been spurred on by top NASA climate scientist James Hansen's blunt warnings:
Coal is the single greatest threat to civilization and all life on our planet. Our global climate is nearing tipping points. Changes are beginning to appear, and there is a potential for explosive changes with effects that would be irreversible
Hansen himself has been arrested protesting coal mining. The Sierra Club’s Beyond Coal campaign has become a nation-wide, highly mobilized and successful effort. In just three years, 181 proposed US coal plants have been cancelled and 153 existing US coal plants have either shut down or announced firm dates for shutting down. Lots of Americans are fed up with coal pollution, and many are now taking effective action. New York mayor Michael Bloomberg alone gave $50 million of his own money to the Beyond Coal campaign.
6: CO2 PRICING – A new US Congressional Budget Office report says that a carbon tax similar to the BC's Carbon Tax would cut the American deficit by a trillion dollars over the next seven years. It would also reduce US climate pollution by 10% along the way. Carbon pricing is increasingly being considered as part of a US debt crisis solution in part because it is by far the largest source for debt reduction that has been proposed.
Americans have many safer alternatives to coal burning that would become economically viable by such a price on carbon. For example, my chart below shows the results of US Energy Information Agency (EIA) modelling of coal burning under a slowly rising carbon price. As you can see, the marketplace replaces 90% of coal burning with climate cleaner alternatives in that scenario.
Just one of many huge carbon bubbles
The US coal meltdown is a glimpse into the economic future for all of the dirtiest of fossil fuels as the world moves to prevent a climate catastrophe from taking hold. Just about every major fossil fuel deposit is at risk. The more climate polluting the carbon deposit the more risky it is. Here are a few examples: