Half US$370b in coal assets globally may be useless: Gadfly commentary

[SYDNEY] As the planet's climate shifts, lots of things we never expected to happen so quickly have started to occur. Each one of the last 11 months through March, for example, has been the hottest on record for that time of year, according to the US's National Oceanic and Atmospheric Administration.

A baseline reading of 400 parts per million of carbon dioxide in the atmosphere could become a reality within days, the Sydney Morning Herald reported earlier this week, bringing the world a step closer to the 450 ppm level where temperature increases of 2 degrees Celsius or more become likely.

Here's another thing many didn't expect to see so soon: the emergence of a class of fossil fuel assets that may never again be economic.

More than half the assets in the global coal industry are now held by companies that are either in bankruptcy proceedings or don't earn enough money to pay their interest bills, according to data compiled by Bloomberg.

In the US, only three of 12 large coal miners traded on public markets escape that ignominious club, separate data show. The largest of those, Consol Energy, is morphing into a natural-gas producer.

Assets held by publicly traded coal companies are worth US$411.8 billion. It's not true to say no one saw this coming. Climate change campaigners have been warning of the threat of stranded assets - fossil-fuel reserves that can never be exploited if the world hopes to avoid 2 degrees warming - since at least 2012.

If the world is to limit global warming to below 2 degrees, then between two-thirds and four-fifths of such reserves must stay in the ground, Bank of England governor Mark Carney said in a speech last September, citing IPCC figures.

What's remarkable is how quickly the forecasts of analysts have come round to match those of activists.

Coal "has undergone a long-term structural decline, with little prospect for near-term recovery," Moody's analysts led by Anna Zubets-Anderson wrote in a note last week.

Of the four major US coal regions, only the Illinois basin has good long-term prospects, they said. Central Appalachia will "cease to be a major coal producing region," while the Northern Appalachian and Powder River basins will decline too because of competition from gas.

To be sure, there are some significant differences between what's happening and the stranded-assets road map forecast by most climate campaigners. Coal isn't dying off because of truly coordinated global action on carbon emissions, but because of a more ad hoc collection of regulations and incentives, and because of the rapid fall in natural gas and renewable energy prices.

In addition, that US$412 billion in assets held by publicly traded coal companies contains barely a ton of unmined rock - the "assets" focused on by climate activists.

Mining companies generally don't factor mineral reserves into their balance sheets, so the assets in Gadfly's analysis are mostly inventories, cash and invoices, and the machinery used to wash, process and load coal onto trains. If anything, they're the tip of the iceberg.

What could improve coal's prospects? Chapter 11 is often regarded as a blessing in disguise if it leads to the elimination of debt and the consolidation of unprofitable industries. Just look at North American airlines, which posted more profit last year than in the previous 10 combined after decades spent lurching from bankruptcy to bankruptcy.

Companies that could be shuttered are numerous, but the question is whether any restructuring of obligations will be enough to restore profits.

Of the US$162 billion of assets owned by non-bankrupt coal companies with interest cover below 1, just US$35 billion was held by firms that posted Ebit margins above 5 per cent in the most recent year.

Because those margins are before interest, these companies are barely profitable even ahead of debt questions coming into play. Should any of them fall into bankruptcy, their best hope of restructuring will require sloughing off environmental, employee and supply-chain liabilities, as well as cutting borrowings.

Rebuilding North America's airline industry was also made easier by the fact that demand for air travel keeps rising. That's not the case with coal.

Indeed, consumption by the two biggest consumers - China and the US - is in long-term decline (it's already fallen close to zero at times in the UK, the country whose deposits helped ignite the industrial revolution).

If supply is to chase that fall in demand, the only route back to profitability will surely pass through a huge number of pit closures. Coal's season in hell has barely begun.

Gadfly is only counting companies for which interest-cover data is available.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

BLOOMBERG