Resurgence of Coal - Sustainability in Question?

In the ever-evolving landscape of energy production, the coal industry finds itself at a crossroads. The demand for coal, long a mainstay of the global energy sector, is expected to plateau and gradually decline as the adoption of green alternatives accelerates.

This shift is reflected in the decisions of major players in the industry. For instance, the FTSE 100 commodities giant, Glencore, has abandoned plans to spin off its coal business, signalling a recognition of the changing times.

This trend is not isolated to Glencore. Many energy companies and miners announced their intentions to step away from fossil fuels in 2021, driven by concerns over Environmental, Social, and Governance (ESG) issues.

However, the narrative is not entirely bleak for coal. Karen Kwok, writing on Breakingviews, notes that coal remains a cash-generative and potentially useful resource in the energy transition.

The continued profitability of coal has led some big investors to dismiss ESG concerns as a "fad". Yet, the energy crisis following Russia's 2022 invasion of Ukraine served as a stark reminder of the vulnerabilities of over-reliance on any single energy source. This re-evaluation of fossil fuels by investors has further complicated the coal industry's future.

Developing countries, including China, India, and Southeast Asia, now consume three-quarters of global coal supply, compared to a third in 2000. This heavy reliance on coal for energy in these regions presents a significant challenge to the global push towards decarbonisation.

Despite the continued demand in developing countries, rich countries such as the US and EU have significantly reduced coal consumption by more than a fifth in 2023. This reduction in consumption, coupled with the increasing focus on ESG concerns, has made financing new coal mines and acquiring permits for them a challenging prospect.

The volatile supply and demand for coal have made trading coal over the next few years a risky game. The International Energy Agency reported that thermal coal benchmarks topped $400 a tonne in 2022, but have since slipped about two-thirds. As of now, Newcastle coal futures, the Asian benchmark, are trading above $145 a tonne.

The largest investor in the past 12 months addressing ESG concerns by reducing coal investments has not been explicitly identified. However, data indicate that long-term investors are increasingly avoiding fossil fuel investments due to climate-related risks, and databases exist to inform investors about these risks.

Looking ahead, global coal consumption in 2026 is set to be 2.3% lower than in 2023. With ESG concerns deterring banks from financing new mines and the continued decline in demand, the future of the coal industry remains uncertain.

In the midst of this uncertainty, Glencore, the world's biggest listed coal producer, stands to net approximately $6 billion from coal in 2024, which is roughly a third of their total earnings. This underscores the lingering financial appeal of coal, even as the industry grapples with its environmental and social impact.

As the coal industry navigates this transition, it will be interesting to see how companies balance the financial rewards of coal with the growing pressure to adopt greener alternatives.