Coal companies like WHITEHAVEN COAL LIMITED (ASX: WHC), New Hope Corporation Limited (ASX: NHC), and Yancoal Australia Ltd (ASX: YAL) are squirming. Their depressed values might look attractive to investors who believe the current low coal prices are merely cyclical, but is it time to buy?
After all, the coal lobby is finally pushing back against divestment campaigns that are hurting coal miners' share prices. To quote the CEO of the Australian Mineral Council, "those with a social conscience want to deny poor nations' access to the cheapest and most abundant energy source available." I think he means coal.
Ironically, the sun itself is responsible for all the energy stored in coal (and oil, and gas). It is forecast to keep shining, the wind to continue to blow, and the rains to replenish (most) rivers. Renewable energy is more abundant than coal.
In certain circumstances coal is "cheaper" than renewable energy. Of course, you have to ignore the external costs: health impacts due to particle pollution, the loss of land to mining, the pollution of water tables, the loss of flora and fauna, and, dare I mention it, climate change. A 2011 Harvard study estimated the external cost of burning coal for power in the USA to be $175 – $523 billion annually. Obviously, we still need coal to make wind turbines and solar panels – it definitely has its uses.
However renewable energy is rapidly becoming a cheaper electricity source. To quote a Bloomberg report from February this year, "India's solar power cost fell to a new low, edging closer to coal." Indeed, this is the case everywhere. A December 2013 report from Credit Suisse forecast "renewables meeting the vast majority of future power demand growth" in the USA.
While India will continue to burn its own coal, importing Australian coal will rapidly become less attractive. Eventually this economic reality might even hurt coal hauler Aurizon Holdings Ltd (ASX: AZJ), though with take-or pay contracts under the belt, they are sitting pretty for the short and medium term. Ironically, the best hope for Australian coal producers is that the Indian government mandates the use of higher quality Australian and South African coal, displacing Indonesia's low quality coal.
In some instances new coal plants will be built in Africa. As Codan Limited (ASX: CDA) shareholders know, an investment thesis based on exports to Africa has genuine sovereign risk. If poor African countries wish to become beholden to coal imports, so be it – but I doubt it's in their long-term interest to do so.
Solar has great potential to alleviate energy poverty in Africa. To quote Abu Bakr Bahaj, of the University of Southampton: "In most developing countries the cost of connecting the national grid to remote regions is too expensive. For rural areas, self-generation is the only viable option, with renewable off-grid solutions in most cases able to provide cheaper options with no fuel cost and low maintenance."
UK Bank Barclays has also weighed in. "Over the next few years" they wrote, "we believe that a confluence of declining cost trends in distributed solar photovoltaic (PV) power generation and residential-scale power storage is likely to disrupt the status quo." A diversified miner such as BHP Billiton Limited (ASX: BHP) is more likely to survive this disruption than a company purely focussed on coal.
The risks of investing in new coal mines are too great for a value investor, and I would not want direct exposure to coal mines in any event. To quote Ross Garnaut AO: "Catching up with reality sooner rather than later will limit the amount of good money that is thrown after bad."
