A pact with the devil, and an unstoppable decline

Last Friday, I wrote about the economics which are driving the decline of coal power (here). I’d suggest it’s reading that one before continuing, if you haven’t already…

I want to follow that up now by addressing a curious development in the coal sector – sharply rising coal prices. They’re up 60% over the last few months…

Given that coal-related stocks have taken a beating often in the 90% plus range, some people will be wondering whether this surge in prices signals a buy opportunity.

They will be looking, no doubt, to the huge numbers of coal plants being built in China as evidence that demand isn’t dead.

I would challenge both the rising prices and the China argument though, and intend to do so now.

I am a pretty cheerful contrarian. And despite being a huge energy transition advocate (see above), I have not shied away from recommending oil and gas stocks of various types since their low in March.

I am also a big fan of the belief in a reversal of the commodities down trend. I like gold, I see inflation coming, it all fits.

Coal therefore, could be a great fit for my contrarian allocation in my four-part approach to investing in 2021. I’m not shy of fossil fuels for ethical or ideological reasons. I am a big fan of contrarianism and it doesn’t get more contrarian than this.

But my analysis just takes me in a completely different direction.

Investing in coal now requires you to believe that coal stocks have only been sold off as part of some trashy, virtue-signalling global investor conspiracy to deny coal companies capital.

The evidence suggests that this isn’t true.

That has formed one part of a massive trend which has simply rendered coal uncompetitive. Alternatives offer cheaper and cleaner energy.

So what do higher coal prices mean for the industry?

The contrarian coal crowd who are rejoicing might want to think about this.

Because it’s not death to those annoying virtue signallers. In fact, higher coal prices are great for the transition, because they make renewables look even more attractive than they already do.

If solar and wind were already cheaper than coal for two thirds of the world’s population, that number will rise correspondingly, as coal prices rise.

So if you’re thinking of making a contrarian bet based on rising prices, remember this.

Rising prices will only accelerate the phase-out of coal plants. And that phase-out has moved fast enough that 2020 saw more GW of coal capacity retired than built, despite China’s best efforts.

This is the Faustian bargain.

Coal is a deal with the Herr Mephistopheles himself, and while you may briefly glimpse a decent return in a few small corners, beware that the higher they go, the more inevitable the fall becomes.

And if you’re thinking of investing because China is building hundreds of plants, I’ve got news for you too.

China’s coal consumption peaked in 2013. Since that time, it has completed roughly 450 GW of coal capacity. So new plants don’t necessarily mean more coal consumption. Many of its coal plants are running well below capacity.

It’s probably just an easy way for local governors to meet GDP growth targets, if I’m cynical.

China’s coal plants will be a classic example of stranded assets. Built to create jobs and growth, but hardly used.

Why would you use them, when other forms of power are much cheaper, and don’t kill your citizens?

Also – don’t forget to put things in a per capita perspective. It may seem like China is a huge coal consumer. But it’s a huge everything-consumer. In per capita terms, China is nowhere near as bad as the US, where the average person consumes around four times as much energy as the average Chinese person.

China produces more solar and wind than any other country. It’s the biggest investors in renewables in the world, and has been for about a decade. It is responsible for most of the solar industry’s development and price reductions.

China has done more for the renewables industry than any other country.

It has committed to Net Zero by 2060.

So it’s not as simple as saying China is building coal plants, so clearly it doesn’t care about the climate.

It does. Its people suffer more from pollution than perhaps any other – with life expectancies in its largest cities reduced by a number of years in some cases. It’s put long-term commitments in place, and is doing as much as anyone to build out renewable generation and production.

One final bit of news, this morning, caught my eye. Investors aren’t the only ones wondering whether China might still revive the coal industry. American coal exporters hoped so too.

One of the main targets of their optimism was the planned Millennium Bulk Terminals on the US Pacific Coast, which would have the potential to export 44 million metric tonnes per year of thermal coal.

Over the weekend through, its bankrupt owner pulled out, making it almost the tenth project to be abandoned on the US West Coast.

The Financial Times reported this quote, from Clark Williams-Derry, analyst at the Institute for Energy Economics: “It’s the end of the pipe dream that Asia can save the US coal industry.”

So there you have it.

A two-day tirade on coal, and some truly bad news to boot.

It’s dirty, pricey, and in the medium to long term – doomed.

The best you can hope for from higher prices in the short term is a very quick buck indeed, but perhaps not more than that.

If you would rather flip this equation and take a much longer term view, the energy transition offers a very different bargain.

Green stocks, clean tech and renewables have had an incredible year or two.

Extraordinary gains, the likes of which I have never seen or experienced before.

If you’ve been on this trend already, and enjoying some healthy gains, then we’ve got something exciting coming down the pipeline for you soon, so watch out for that.

All the best,

Kit Winder
Editor, UK Uncensored

PS James and I have been working on something quite special lately. If you’re already a subscriber to Exponential Energy Fortunes, then we’ve got some very exciting news for you.

I’ll tell you more in the coming week or so, but for now all I’ll say is this: if you thought last year was exciting… well, just hold on to your hats.

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