High coal prices are unlikely to spur investment in dirtiest mines

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High coal prices are unlikely to spur investment in dirtiest mines

In years the highest coal prices aren't enough to spur investment in dirtiest coal mines, given the increased efforts of governments and financial institutions to disarm the worst fossil fuel.

Prices are doubling from Europe to China as demand for coal recovers from a virus-induced hit and temporary mine overages curtail supplies. Although companies remain hesitant to invest in long-term projects with financing difficult to come by and questions over new demand remain.

That's a boon for miners' bottom line but goes against the grain of the typical commodity cycle, where high prices are a signal to increase production and eventually bring the market back in balance. The disruption to fossil fuels underscores how broader environmental goals are changing investment patterns for normal fuels.

We expect most coal miners to try and absorb the current increase in coal prices, rather than commit to new supply, said Viktor Tanevski, a Principal Analyst at Wood Mackenzie Ltd. There remains a void of projects that are already under construction or construction-ready that can be fast-tracked to mitigate price pressures.

New coal production is likely to hit the economy by heavy rains in Colombia, China's Mine Safety Push and strikes in India. Demand has increased 10% to 15% in Europe this year, according to Axpo Solutions AG, after a colder-than usual winter left gas storage depleted.

On Wednesday, the futures for high-quality coal at Newcastle port in Australia, increased to $121.50 a ton, the highest since 2012. Prices in China, the world's largest coal consumer, have increased by 34% since February and are so high that the government is considering imposing a cap on them.

The companies are doing what they can to increase mine output from existing mines. Indonesia's PT Bukit Asam said it would increase production this year with sales showing positive signals. In the United States, the third largest producer, some assets are underutilized, especially after the output plummeting during the pandemic, so miners can add more shifts or hire out some workers, said Lucas Pipes, an analyst at B. Riley Securities.

'You won't find many producers out there who expect that we'll be in a multi-year recovery for coal demand, Pipes said. A coal faces long-term headwinds

Even in China, which produces half of the world's coal, state-owned miners are shrinking capital spending from customers, said Michelle Leung, a Bloomberg Intelligence analyst. Older, smaller mines are being closed across the country, and companies are replacing them with larger assets to keep product production relatively steady, she said.

High carbon prices in Europe are making some operations unprofitable and others are closing as governments try to speed up the transition to energy. Germany's Energie supplier Eins Energie Co. KG, based in the east city of Chemnitz, plans to shut down all its coal-based electric power and heat generation activities as early as 2023.

Investing in new coal capacity is India's Adani Group. The conglomerate, which is also one of the biggest renewable power operators in the country, is laying soil and digging railroad tracks in northeast Australia to produce its first coal this year from the Carmichael mine that eventually supplies 10 million tons a year.

'We have long been confident that population growth and rising living standards in the Asia-Pacific region will drive continuing growth in the generation of electricity for India, especially in China, said Adani Australia Chief Executive Lucas Dow. Both coal and renewables will be needed to provide affordable, reliable power, while at the same time reducing emissions intensity.

Adani's experience in working on the project may be one reason for such a rarity of whole new projects, outside of existing mine sites. It took nine years from when the operation was first proposed to secure public approvals, and faced scathing final criticism along the route.

At the same time, financing has become more difficult, as banks also become over-privileged in the sector to boost new green credentials. That leaves more expensive borrowing via private equity as the only route for the majority of miner who can't fund new projects on their own balance sheet, said James Stevenson, lead researcher for coal, metals and mining at IHS Markit Ltd.

Even as the world moves away from coal, demand will remain strong through 2030 and, without new supply, prices are likely to stay high, he said. When the market, like now, is squeezed, price spikes won't discourage new supply, but will kill mini-waves of coal power plant closures that will continue to reduce consumption until the market rebalances, said Stevenson.

More stories like this are available at bloomberg.com on bloomberg.com.

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