Peak Coal?

Would you invest in an industry which: 

  • Is selling its product at a price which is at a six year low;
  • Has an estimated 20% to 30% of producers operating at a loss;
  • Has laid off an estimated 12,500 workers over the past two years?

This describes Australia’s coal industry at October 2014, according to the Australian Financial Review (11-12 October 2014).

Worldwide, investors large and small are divesting themselves of fossil fuel producing companies, including coal.  A list appears at the foot of this article.

Two primary reasons are influencing the divestment decisions: economic factors; and ethical factors.

The industry has reacted strongly, almost hysterically, and attempted to counter both of these factors.

The industry has used a Rice Warner study which found that a 35 year old earning $75,000 who switched 10 years ago to a socially responsible fund would now be $3,700 behind a conventional fund.  The study said that figure would rise to $68,000 by retirement.  Some people may feel comfortable with that.  But the study is irrelevant for two reasons.

  1. The first thing an investor learns is that past performance is no guide to future performance – one of many examples is the rapid rise of the NASDAQ index in the 1990’s only to be followed by a crash.
  2.  
  3. The difference between a socially responsible fund and a conventional fund is about much more than coal or even fossil fuels.  The correct comparison would have been between a conventional fund excluding coal and one including coal.

The industry has attempted to portray coal as a humanitarian commodity – reversing energy poverty.  But in the future, there are other energy sources which can do the job.  These include:

·        Nuclear (fission) power.  Australia’s Prime Minister has agreed to sell uranium to India for generating electricity, despite India not being a signatory to the nuclear non-proliferation treaty.

·        Renewable energy. US President Barack Obama has recently reached an agreement with India on measures intended to accelerate that country’s shift to renewable fuels while helping India’s government to extend electricity to all its citizens.  The deal includes $US1 billion to help India purchase American technology for clean energy projects.

·        Possibly nuclear fusion power.  It has just been reported that Lockheed Martin is working on a reactor which is small enough to fit in a truck and power 80,000 homes – without the risks associated with fission reactors.  It would burn just 20 kg of fuel per year.  The company says that the technology could be deployed in a decade.

Furthermore, in China, a major customer for Australia’s coal, the annual growth rate in electricity demand has fallen sharply to below 4% for the first eight months of 2014 (AFR, 10 October 2014).  China is seeking to reduce chronic air pollution and will deploy more renewable energy to achieve that.

It may, or may not, be a good financial decision to totally divest coal stocks.  But it seems prudent risk management to significantly reduce the proportion of coal stocks in the portfolio.

Charlie Nelson

October 2014

Update 14 November 2014

Australia's biggest coal exporter Glencore will suspend its Australian coal business for three weeks in a move never before seen in the Australian market, to avoid pumping tonnes into a heavily oversupplied market at depressed prices.
The Sydney Morning Herald

Divestors

May 2014: Stanford University says it will sell about 100 coal companies from its $US19 billion portfolio but will continue to hold oil and gas.

June 2014: US Catholic institution the University of Dayton says it will divest fossil fuel stocks from its $US670 million investment pool.

July 2014:  the World Council of Churches says it will no longer invest in fossil fuels.

September 2014: the Rockefeller Brothers Fund, established by Rockefeller heirs from their family’s oil fortune says it will sell fossil fuel stocks.

October 2014: Australian National University says it will sell seven resource stocks because they fail an environmental, social, and governance test.

October 2014:  Australian Local Government Super Fund says it will no longer invest in coal stocks, basing its decision on economic factors.

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