Australian coal investments at risk of becoming ‘stranded assets’ – Oxford study says

Australia’s coal investments may have been in vain. New research suggests that Australian coal’s second-biggest customer, China, could be headed for a coal-free diet.

According to a new report by Oxford University, commissioned by HSBC’s Climate Change Centre of Excellence, China’s demand for coal is changing. Driven by environmental concerns, political pressure, developments in cleaner technologies and gas markets, the Asian giant could reduce its consumption. This could drag down prices, putting Australia’s coal reserves and infrastructure at risk of becoming ‘stranded assets.’

As the world’s biggest coal consumer, China certainly has the ability to shift coal prices.

“These developments are not factored into the positions that most coal owners and operators are currently taking” Ben Caldecott, co-author of the report said in a statement. “Policy makers need to wake up to these risks as well.”

The study raises one main question: Should any more capital be allocated to new coal projects?

But Australia is in the midst of some major coal mine action. The country’s Galilee Basin is bursting with coal-related projects such as Indian company Adani’s proposed $10 billion Carmichael mine which would produce 60 million tonnes per year.

Many of these projects are only justified on the basis that China’s coal consumption will rise, the report reads.

Study authors argue that in order to “minimise the risk of stranded assets, the companies involved should further interrogate the coal price assumptions underpinning the investment” of their projects. “Investors should seek clarity on the opportunity costs associated with deploying finite capital into them too.”

The report also warns lawmakers against relying too heavily on coal production as a source of tax revenue.

“Less production will reduce royalty payments. The Queensland government in particular, notionally has much to lose from the mega-mines in the Galilee not going ahead.”

But whether or not China will consume less coal is a matter of debate. Just last week the China National Coal Association (CNCA) announced its predictions that Chinese coal consumption will reach 4.8 billion metric tonnes by 2020, a 1.3 billion-tonne increase on 2012.

And although the government has recently made a push to shut down thousands of small coal mines, it’s also introducing policies to support larger operations.