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Where the smart money isn’t going

Posted by suzanne at May 30, 2013 12:15 PM |
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Diversified global companies are abandoning ship on coal export proposals

Where the smart money isn’t going

Ross Macfarlane, Sr. Advisor, Business Partnerships

By Ross Macfarlane and Craig Toohey

If you are looking to follow the “smart money”, one thing seems increasingly clear:  you should stay away from placing big bets on global coal markets.  In the past month, there has been some pretty incredible news in the global coal markets, underscoring the huge risks, dwindling opportunities, and long odds that coal miners and port infrastructure developers are facing. 

Northwest communities, especially those along the Columbia River, celebrated Kinder Morgan’s announcement that it was scrapping its proposed coal export terminal at Port Westward, Port of St. Helens.  Kinder Morgan is a hugely profitable company with its fingers in virtually every kind of fossil fuel infrastructure, from coal ports (it controls 20% of the US export market) to oil, tar sands and natural gas pipelines.  While fierce opposition  from communities concerned about coal trains, health and global warming played a large part in Kinder Morgan’s decision, it is likely that it was also heavily influenced by collapsing global coal markets.

Kinder Morgan isn’t alone.  In the past month, some of the world’s largest and most profitable mining companies have cancelled or suspended investments in export terminals and thermal coal infrastructure.  The world’s largest mining company, BHP Billiton announced this week that it was selling some mines, closing others, and essentially ruling out new coal projects.   Although poor markets are the primary reason for the decision to reduce its coal investments, BHP Billiton’s top coal executive surprised many when he stated last year that coal usage was likely to go down in a carbon-constrained world, “and frankly it should.”

Here are some other recent headlines from Australia, the global leader in coal exports:

  • Tuesday, May 21, 2013, Australia: The Wall Street Journal reports that giant coal miners Glencore Xstrata and Yancoal Australia Ltd. are auctioning port assets worth tens of millions of dollars as they seek to shed costly coal export contracts put into place while prices were climbing.  In a move that appeared unthinkable as recently as 18 months ago, when coal companies were scrambling to secure capacity, the companies are looking for any buyers for the port capacity that they can no longer use.  Analysts are calling this a “huge turnaround” and predicting that few buyers will be available. 

 

  • Monday, May 13, 2013, Balaclava Island, Queensland, Australia: Australian company Glencore Xstrata announced a decision to stop work on a planned coal export terminal in eastern Australia, citing poor market conditions and oversupply.  This story provides a compelling parallel to the situation in the northwestern United States, where companies are struggling to demonstrate the financial feasibility of coal exports as prices for the fossil fuel fall.

 

Coal’s poor global outlook – starkly illustrated by recent news from Australia – is hugely significant for companies seeking to raise billions of dollars to finance export terminals for coal in the Northwest. 

Globally, major companies are recognizing the huge risks inherent in developing and maintaining coal export capabilities, leading those with options to invest elsewhere.  Even Peabody Energy, the largest US coal company and one of the biggest players behind the proposed Gateway Pacific terminal in Whatcom County, is trimming output and laying off thousands of workers in Australia as the export markets dry up.   

Similarly, mines are already struggling in the Powder River Basin in Wyoming and Montana (the source of the coal targeted for Northwest Ports).  Ambre Energy’s Decker Mine, for example, laid off  half of its workers late last year.  Just last month,  developers of Wyoming’s only new coal mine stopped work  due to soft domestic markets and lack of any way for miners to get their coal to Asia. 

But the Australian trends are particularly significant, since that country has been the global leader in coal exports to China and other Asian economies and is the most affected by changing market dynamics.   A recent report by Deutsche Bank suggests that softening demand growth and oversupply will push coal prices down in real terms through 2020.  Deutsche Bank makes it clear that major port infrastructure projects are a very risky bet in this market environment.  Even Goldman Sachs, a major investor in the Gateway Pacific Project, has predicted that Chinese coal demand will decline as the country begins to deal with its immense air pollution and health challenges and begins to cap climate pollution and coal consumption. 

“The market’s pretty much dead,” said Warwick Grigor, executive chairman of Canaccord BGF, an Australian stockbroker specializing in the emerging mining sector.  “For many of the small coal companies, it’s just not going to happen unless you have very deep pockets and even then nothing is certain.” 

Make no mistake -- international giants like Kinder Morgan, BHP Billiton and Glencore are hard core fossil fuel companies that would likely not make anyone’s list of socially responsible investments. In general, they are only motivated by one thing: their cold calculation of the risk-adjusted return they can expect from any investment.  They have lots of options regarding where to deploy their money, and increasingly are unanimously voting with their wallets to give the coal export markets a pass.  With these companies scrapping plans to invest in coal export terminals and export dependent mines, it appears to be mostly the desperate companies that lack good strategic options (read Cloud Peak),  and the wildly speculative  (read Ambre Energy) that are doubling down on their export plans.

So, with the smart money rushing for the exits, you have to wonder how long these proposals will survive in the face of overwhelming community concerns and plummeting markets.  Checked your 401(k) lately?

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