Turning a large fortune into a small one

By August 18, 2019Technology

It is suspected that the Morrison government will spend our money to keep the archaic Liddell coal-fired power station open or even to build a coal-fired power station1. This, as any climate scientist will tell you is vandalism, and as any economist will tell you is a ludicrously poor investment. However, for the government, these are of no concern. Not only does the government deny climate science, but their economic concern is not for the nation or the people in it, but for donations to their political parties. However, I digress.

As most people know, there are two main uses for coal, the generation of electricity and the making of steel. The coal used for the former is called thermal coal or steaming coal, while that used in steelmaking is called metallurgical coal or coking coal. The main focus of those agitating for an increase in the use of renewables is the coal used in generation, which takes about 68% of world consumption. Steelmaking uses about 7% of world consumption with the remaining 25% used in other industries and for home heating3  (this was how we heated our home in the early 1960s).

Unless you are a malevolent venal government only concerned with your short-term bank balance, you’d be a mug to invest in mines producing thermal coal or the power stations burning it. Even worse, is to develop the coal in the Galilee Basin, where the coal is of poorer quality (i.e. high ash and low energy content) than that from mines in other coal basins (e.g. the Sydney Basin). That poorer quality coal is declining in price compared to the coal with lower ash and higher energy content4.

Coal production has been stagnating for a while, and global demand is forecast to be stable or stagnant through to 2023, with declines in most western countries and China offset by growth in India and some other Asian countries. Coal’s share of the total energy mix is projected to decline from 27% to 25% over the same interval. It seems likely that demand for coal peaked in 20145. Even though prices are still reasonably high, this is not translating into new investment. This is because of the threat of coal mines becoming stranded assets (i.e. non-performing investments6), and divestment by banks, insurance companies and hedge funds. Thermal coal really does have no long-term future.

Unlike most places, Australia’s exports of coal are more balanced, with almost half (47%) of our coal exports by volume, being for coking coal. Because coking coal is sold at a premium, that 47% by volume is worth almost 65% of the total value of coal exports. One would therefore think this would in part insulate Australia from the worst of the decline in thermal coal demand. This assumes that coal will always be needed for steelmaking; however, this may not always be so. Three Scandinavian companies, steelmaker SSAB, iron ore producer LKAB, and electricity generator Vattenfall have joined forces to create HYBRIT, an initiative to change the way steel is made. Instead of using coking coal (which emits carbon dioxide: CO2), the process uses Hydrogen, which emits only water when burnt. While a pre-feasibility study conducted in 2016-2017 determined that this ‘fossil-free steel’ would be 20-30% more expensive, it was suggested that the continuing decline in electricity prices from renewables and increasing costs of CO2 emissions in the European Union Emissions Trading System (ETS), would make it competitive in future. The next phase of HYBRIT has commenced, with the construction of a pilot plant at the SSAB site in Luleå, Sweden, at an expected total cost of SEK 1.4 billion (about A$210 million). Apart from this, SSAB plans to convert one of its blast furnaces in Oxelösund, Sweden into an electric arc furnace, thereby decreasing its CO2 emissions by 25%7. So, while the future of coking coal may be better than that of thermal coal, it may not be much better; and perhaps may be a good way to turn a large fortune into a much smaller one.

Sources

  1. https://www.theguardian.com/australia-news/2019/mar/13/coal-baron-trevor-st-baker-says-he-has-not-sought-taxpayer-support-for-liddell
  2. https://www.worldcoal.org/coal/uses-coal
  3. https://jancovici.com/en/energy-transition/coal/using-coal-but-what-for/
  4. https://www.canberratimes.com.au/story/6332768/unclear-claim-on-steelmaking-coal-exports/
  5. https://www.iea.org/coal2018/
  6. https://www.marketforces.org.au/info/key-issues/stranded-assets/
  7. http://www.hybritdevelopment.com/hybrit-toward-fossil-free-steel

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