The Kellow theory is that the end result of activism, divestment and departure is an increasingly constrained coal supply and that could be a pretty neat thing if coal really can maintain its critical place in global energy.
Kellow’s latest opportunity to promote the profitable potential of a “contrarian” response to the headwinds facing the coal sector landed overnight at CERAWeek, Houston’s legendary annual energy conference.
“While both market and company-specific factors will still lead to winners and losers, recent industry challenges may paradoxically enable greater financial strength for those that take a contrarian position and remain,” Peabody’s boss asserted.
Two main forces
Kellow distilled the forces massing against coal to two related fronts; activist-inspired regulatory delays and sectoral divestment.
“The first is environmental activism. Permitting of a mine or a port is likely to bring substantial pushback and delays in production that limits sourcing,” Kellow said.
“The second dynamic is the turning away from coal by certain global diversified miners and some investors through fossil fuel divestment. This, too, limits sourcing opportunities.”
Activism has also changed the ownership profile of coal with big investors making big miners increasingly aware of their discomfort with exposure to a sector where a collision of risks now sits heavier on the scales of shareholder value than the potential long-term returns.
Kellow ran through a checklist of the changed tectonics of coal ownership.
“The world’s largest mining company’s [BHP] divestment of much its thermal coal while still retaining the largest export portfolio of met coal; the world’s second largest mining company’s [Rio Tinto] complete exit from coal; the world’s largest seaborne thermal coal supplier’s [Glencore] rapid surge then announced capping of coal; and the Euro-American divestment movement of fossil fuels all point to an industry not receiving investments in new supply to the extent it would have as recently as the beginning of this decade.”
Demand still strong
What hasn’t changed though, at least not through the lens that Kellow uses, is the outlook for coal demand.
“Ironically, though, very little of this impacts the underlying demand of our product, particularly in the busy ports of dozens of Asia-Pacific nations. Again, demand edges up as supply remains tight,” he observed.
Kellow, who introduced his speech with the observation that “the story of global energy is not one of good versus evil”, offered up a few of the data points that inspire his contrarian determination to stick with Peabody’s carbon knitting.
“It is a tale of the pursuit of two ‘goods’ – affordable, reliable energy and reduced emissions. Maximising the benefits while minimising the costs are what so many of us are about every single day,” he said.
The basic building blocks of Kellow’s confidence are that the world presently consumes about eight billion tons of coal annually and the estate of installed coal generation continues to grow at a rate that at least replaces the retirements that are occurring across Europe and the more mature Asian economies.
There is current and future serendipity in this. Kellow estimated that Asia’s “coal generation fleet” is less than 15 years old. So Asia’s power infrastructure is both emissions lighter than generation in more mature electricity bailiwicks. And that relative modernity makes an easier task of retrofitting them with evolutionary or revolutionary emissions containment technologies.
Future for carbon capture
Kellow said the “grand prize” in the emissions game is carbon capture and storage.
“The technology exists today, though it is only through learning by doing that we optimise project costs to deploy at scale,” he said, “In addition, there are transformational technologies in the innovation pipeline that promise to reduce costs even further with continued research and development.”
Kellow noted renewed enthusiasm for CCS in the US in the wake of the introduction of a Trump-endorsed tax break called 45Q. It creates a tradeable tax credit for carbon captured and stored or transformed. The scheme, which was signed into law in February 2018, provides a credit of $US50 ($71) a tonne for carbon stored and $US35 a tonne for carbon recovered and transformed. And it has already inspired Occidental Petroleum to invest in a carbon capture project and there is said to be a gathering host of projects on the drawing boards awaiting clarification from the US Internal Revenue Service on how 45Q will be administered.
The way Kellow sees it, whether coal demand may or may not have peaked doesn’t matter that much for the moment. The demand pie is huge and the world will continue to need mines, trains and ships to meet its needs.
“A bit more than one out of every four units of energy in the world comes from coal – and the International Energy Agency has noted that this share has actually edged up in the past four decades – and off of a much larger base,” Kellow said.
“For the first time ever in 2018, global coal-fuelled generating capacity topped 2000 gigawatts (GW),” he continued. “That’s a massive 62 per cent increase since the year 2003. And each GW can use about 3 million tons of coal per year. Some 300 GW of new coal-fuelled generation is under construction in Asia alone – more than the entire existing US coal fleet. More than 40 nations have added coal-fuelled generation since 2010.”
It is worth noting those more pessimistic about coal’s place in the global energy diet warn that installed capacity is not the lead indicator of demand that it might once of been. The more relevant indicator is capacity utilisation and that is falling across a host of coal’s erstwhile heartlands such as the US, Europe and even Australia.
Extra demand evidence
Back in Houston though, the Kellow’s positives just kept on flowing.
For example, if you build things you will need coal. The annual consumption of 1 billion tonnes a year of metallurgical coal is presently unavoidable because you can’t make steel without it. And coal provides about 70 per cent of the energy needs to make cement. If you don’t have steel or cement, what can you build?
Oh and the switch to electric buses, cars and scooters along with Asia’s embrace of high-speed electric trains is also a good thing for his sector because it sees coal “returning as a major transportation fuel in places such as China”.
People are living longer, getting better educated and earning more than that all adds to electricity demand “and more of the world’s electricity is fuelled by coal than any other source”, Kellow claimed.
Even in the US, where “years of regulatory burden, financial incentives to switch fuels, and a country-specific shale play have created a secular decline”, coal sits yet on the front line of the power matrix. Kellow estimated coal fuels about 25 per cent of US generation and noted peak demand triggered by the recent polar vortex saw coal lift its supply run rate to 37 per cent of system demand.
“To complete the thought, the coal industry of course faces multiple challenges,” Kellow finished. “The twist here is that within our challenges may be embedded opportunities. Those opportunities present themselves for those of us with the wherewithal to remain financially sound, to manage well, to insist on responsible mining, and to encourage advanced technologies to continually reduce emissions.
“I suspect that coal will remain viable for far longer than some would like – but for far greater good of multiple stakeholders than many might realise.”