Up to US$21 billion annual spend on thermal coal assets reflects high risk strategy of China’s coal companies in face of rapidly transitioning energy sector

Peaking thermal coal demand puts up to 40% of China’s coal-fired power generation capacity potentially at risk of becoming stranded by 2020

Lower-than-expected Chinese thermal coal demand threatens to leave those investors not actively assessing their Chinese coal holdings bearing the brunt of stranded assets and wasted capital, says a new report today from the Carbon Tracker Initiative and ASrIA (the Association for Sustainable and Responsible Investment in Asia).

Thermal coal currently provides just under 80% of China’s power.

However, with some forecasting China’s thermal coal demand to peak between 2015 and 2030, the new report, ‘The great coal cap: China’s energy policies and the financial implications for thermal coal’, explains how peak demand could be realised at the earlier end of this forecasted range (Figure 1) due to:

  • Slowing GDP growth and decreasing energy intensity reducing China’s power demand growth;
  • Policy responses to the air pollution and water scarcity crises reducing the attractiveness of coal to meet power demand;
  • Pilot emissions trading schemes and discussions about a carbon tax increasing the perceived risk to the future cost competitiveness of coal power; and
  • Strong predicted growth for China’s renewable energy technologies and other non-coal power sources.

By 2020, the difference between a business as usual path and an ‘early-peaking’ trajectory from a combination of these factors is equal to: (i) 56% of China’s thermal coal supply in 2012; and (ii) 437GW of coal-fired power capacity – 40% of total capacity in 2020 (Figure 2). This indicates that there is significant potential asset stranding as a result of lower-than-expected demand within China’s thermal coal sector.

These changing dynamics of China’s power sector also poses a risk to international coal exporters betting on China’s insatiable demand for coal continuing in the future. The combination of slowing growth of China’s thermal coal sector coupled with their efforts to increase supply, suggest China’s import demand could decrease rapidly leaving exporters needing to find another end-market for excess supply or be left with stranded assets. This risk is of notable interest to Australian and Indonesia exporters.

This report recommends investors:

  • Assess the value-at-risk to China’s proven thermal coal reserves in peaking demand scenarios and their exposure to these assets;
  • This report reveals China has sufficient proven thermal coal reserves to supply the domestic power sector for another 23 years, predominantly listed on the Hong Kong Stock Exchange (Figure 3 & 4);
  • Require improved disclosures from China’s coal companies with regards to future capital expenditure strategies:
  • China’s potential coal reserves could supply the market for approximately 40 years and coal companies spent US$21 billion last year in exploration and development of further additional reserves (Figure 5); and
  • For new investment analysis, ensure risk factors that determine resilience to lower demand are factored into investment decision-making.

This report calls on policy-makers to:

  • Minimise the impact of asset stranding on current financial assets by stress-testing banks and other financial institutions on balance sheet exposure to stranded asset risk and subsequent risks to market stability;
  • Protect future financial assets by enhancing and extending green finance requirements.
  • Ensure relevant stranded asset risk issues are on the agenda at key meetings of the G20, Financial Stability Board, the Bank of International Settlements and the World Bank.

The report argues:

There is an opportunity for both China and other countries to ease the potential disruption and risks associated with stranding assets. Investors and financial institutions with significant assets at risk should be supported in developing a plan of action for managing the stranding process.

Carbon Tracker Chief Executive Officer, Anthony Hobley, said:

‘China’s ‘Great Coal Cap’ could feasibly peak China’s thermal coal demand in the near-term, presenting a significant risk of asset stranding for those investing on a business as usual future. Questions need to be asked whether committing billions of capital to increase thermal coal supply in a shrinking market is a wise use of capital’.

ASrIA’s Chief Executive Officer, Jessica Robinson, said:

‘China is responding to its environmental challenges in part by diversifying its power generation away from burning thermal coal – investors need to dispel any belief that Chinese coal demand is insatiable and integrate this transition into their decision-making by stress-testing the relative risks of different future demand scenarios’.

Carbon Tracker’s Senior Researcher and Lead Author, Luke Sussams, said:

‘Investors in Australian and Indonesian exporters of coal, in particular, must factor much lower Chinese demand into their demand and price forecasts. If China becomes a zero imports market, which is possible, there is a noticeable lack of any viable alternative growth market for seaborne traded coal. Where will Australia’s US$50 billion of thermal coal go instead?’