Coal, an unloved and fading commodity

With more and more government and leading companies pledging to go carbon neutral by 2060 or earlier, coal investing is becoming less and less popular. Is there any investment opportunities left in the commodity?

There was only one Coal ETF, and it closed

The VanEck Vectors Coal ETF, which was the only coal-focused exchange-traded fund, is closing after 12 years of activity. Introduced in January 2008 under the ticker "KOL", it stopped trading in December 2020 with about $35 million in assets, a very shy version of its height of 2011, when it used to have $908 million.

The move seems natural, as more and more companies are withdrawing from investment in the coal industry. Despite coal futures raising back to $88 per tonne, their highest level since May 2019, fuelled by colder temperatures throughout the world this year, more heating demand and a higher industrial demand from China, things are not looking great for the commodity. This surge in price seems to be temporary, and according to many analysts, the commodity holds little value in the long term.

 

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The Myth of second-life coal and why it does not make sense in the face of the Green Rush

As India's Home Minister Amit Shah recently stated that the country would invest around $55 billion dollar in expanding new and existing coal mines, trying to give a second life to thew commodity with so called “liquefied coal”, many analysts not only saw this strategy as rather inconsistent with the country's policy, but also that the project showed no proof of either scientific feasibility or economic viability. Moreover, any second life plan for the commodity seems severely outdated.

More and more funds, governments and leading corporate are pulling themselves out of coal. This month, New York state's $226 billion pension fund set itself the goal of reducing net emissions of greenhouse gas from its portfolio to zero by 2040. Divesting from coal will go a long way towards this goal. The same idea was followed by many fund managers, as Paris agreement to curb down rising temperature celebrated its fifth birthday. China pledged to be carbon neutral by 2060, and similar pledge followed, such as Japan and South Korea who even aim for the year 2050.

In the United States, President Biden's election means that the United states will most likely play a significant role in the global effort to reduce carbon footprints in 2021. On the EU's side, emission are constantly taxed at EUR 30/tonne, showing the region's dedication to reducing emissions. Finally, many of the biggest financial institutions – 156 and counting –, central banks, global investors and leading global corporates are announcing zero emission pledges, in the hope to start over with good resolutions in a post-Covid world.

With that in mind, investing in coal does not seem like a very popular idea. The risk would be to repeat the mistakes made by China with its coal giants such as China Coal, China Shenhua and Shanxi Lanhua, which all proved to be disastrous. Worse yet would be to replicate the economic disaster of of Linc Energy's coal gasification project, which proved to be a real burden for Australian Taxpayers.

 

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Global coal consumption 2009-2020 (Source: IEA)

Is divesting from coal the best practice? Blackrock’s case

Almost a year ago, BlackRock shared a willingness to dimmish their emissions, by gradually getting out of companies with strong CO2 emission, with Thermal Coal producers being one of them. According to the investment fund, Thermal Coal is becoming less and less economically viable, in addition to being increasingly exposed to regulations because of its environmental impact. As they believe that that this is not a long-term strategy to be followed, they decided to remove any companies that generated more than 25% of their revenue from thermal coal production by mid-2020, in addition to making sure that any company using coal was working towards transitioning out of it.

However, a report suggested that this move was nothing but well-made greenwashing. If the current ban applied to the asset manager's actively managed portfolio, it was not the case of index funds and ETFs, which represent two-thirds of the $7.8 trillion that Blackrock has under management, meaning that many coal dependent companies are still supported by the fund, such as Indian conglomerate Adani. Furthermore, the ban applies to only 17% of the global coal value chain, as many companies use coal, but stay under the 25% threshold.

While Blackrock's disinvestment from coal was generally seen with a good eye, Fiona Reynolds, chief executive of the United Nations international Principles of Responsible Investments, argues that Blackrock could maybe do more good with owned stocks rather that sold stocks. Instead of selling coal stocks and washing their hand from responsibility, large scale companies like BlackRock could hold stocks and lead change by voting against boards of directors and working towards better transitions. Selling stocks might just mean leaving them to buyers who might care more about short term profits than sustainability. Therefore, by selling, Blackrock certainly gives a signal of disinterest, but they are not working towards diminishing emissions. The question is, do they really have this in mind?

 

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Conclusion: Coal seems to be dying?

Now, there seems to be little hope for coal. Despite a regain in price recently, the popular opinion is strongly against it, and the few companies that believe in it are seen with a very bad eye.

The pandemic certainly had a diminishing impact on coal demand in favour of natural gas and renewables, according to the World Bank. The second half of 2020 saw prices stabilize in Q3 but declined in Q4 with a brief rebound at the end of the year. “Based on the assumption of a global economic recovery in 2021, we expect both electricity demand and industrial output to increase,” said an IEA (US Energy Information Administration) report. The agency therefore expects a 2.6% rebound in coal demand, led by China, India, and Southeast Asia. FocusEconomics analyst expect prices to average $62.60 per metric tonne in Q4 2021 and $63.80in Q4 2022, but the recovery will be short-lived. In the end, it is mostly Asia that will set the pace of the fade out.

 

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Coal price in dollars per metric tonne (Chart source: Trading Economics)

 

“It’s a pivotal moment,” says Tim Buckley, an energy markets expert at the Institute of Energy Economics and Financial Analysis. “The financial markets do move so much faster than the real world, they are all about constantly revaluating the risk-return and growth prospects. There’s no long-term growth prospect at all for the coal industry. It’s like trying to catch a falling knife.”

 

Sources:

The Only Coal ETF Is Closing. What It Means for Investors, in Barron's

Sustainability as BlackRock’s New Standard for Investing, from BlackRock

How investing in coal could save the environment. Yes, really, in the New Daily

'Climate pariah': Campaigners urge Blackrock to strengthen coal exclusion policy after counting $85bn of coal investments, in Investment Week

The False Promise of ‘Second Life’ Coal, in the Wire

Coal, in Trading Economics

Coal Outlook 2021: Expected Rebound in Demand to Be Short-lived, in Investing News

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