Carbon Supply Cost Curves:
Evaluating Financial Risk to
Coal Capital Expenditures
Reid Capalino
Senior Energy Analyst
March 17, 2015
IEEFA Energy Finance Conference
who
Carbon Tracker is a non-profit financial think tank working to enable a climate-secure
global energy market by aligning capital markets actions with climate reality.
ETA is an independent research group which analyzes energy markets
in the context of a low-carbon energy transition
Carbon Supply Cost Curves:
Evaluating Financial Risk to Coal Capital Expenditures
How much thermal coal
investment is at risk globally?
Our research on coal consists of a package of
detailed analyses of coal supply, demand and
financial trends
Billion USD
In a 2°C scenario global coal mining
investment halves relative to 2011-13
45
40
35
30
25
20
15
10
5
0
22 21
16 19
34 36 35 33 35
32
27
Note: Figures for mining only (i.e. exclude transport). 450 Scenario average is for 2014-2035.
Source: IEA, CTI analysis 2015
42 43 40
23
Thermal coal prices down 50% over last three years
250
150
100
July 2008 =
$192.5/t
Jan 2011 =
$138.5/t
20152018=
~$60/t
50
0
Feb-00
Feb-01
Feb-02
Feb-03
Feb-04
Feb-05
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
Feb-16
Feb-17
Feb-18
US$/t
200
Newcastle FOB price, 2000-2018 (US$/t)
At current prices, > 50% of thermal coal exporters losing money
Several diversified miners selling thermal coal assets
Company
Mine(s)
Acquirer name
Deal size
($MM)*
Country
Year
$1,105
Australia
2013
Rio Tinto
Clermont
Glencore, Sumitomo
Rio Tinto
Jacobs Ranch
Arch Coal
$764
USA
2009
Rio Tinto
Antelope,
Cordero Rojo,
Spring Creek
Cloud Peak Energy
(spin-off)
$459
USA
2009
Vale
Colombian
mines
Goldman Sachs
subsidiary
$407
Colombia
2012
BHP
Billiton
Koornfontein
Optimum Coal
Holdings
87
South
Africa
2010
BHP
Billiton
BHP Navajo
Coal
Navajo Tribal Council
85
USA
2012
BHP
Billiton
Khutala,
Klipspruit,
Middelburg,
Wolvekrans
Newco (spin-off)
in progress
South
Africa
2014
*Includes net debt.
Source: Thomson One, company reports, CTI/ETA analysis 2014
The Context
Focus on thermal coal through 2035: We analyze supply and demand for thermal
coal through 2035 (longest available timeframe data allowed). Our focus is on the
US and Chinese domestic markets as well as the seaborne export market
(collectively 81% of current global demand).
Demand projections from IEEFA: Tim Buckley from the Institute for Energy
Economics and Financial Analysis (IEEFA) provides our demand projections.
Supply and cost data from Wood Mac: We source mine-level cost and supply data
from Wood Mackenzie’s Global Economic Model data base.
Focus on breakeven coal prices (BECPs) and associated capex, CO2: Combining
demand and supply estimates, we calculate the breakeven coal price (BECP) of
marginal suppliers in specific markets; we estimate potential production
below/above these key levels, and show associated capital expenditures (capex)
and CO2 emissions.
Global thermal coal demand – at its peak?
Projected long-term price of $75/t for seaborne exports
World export thermal cash-cost & breakeven price (BECP) level (2014–2035)
China’s thermal coal demand – projected to hold steady
US domestic cost curve by region
IEEFA low-demand scenario 2014-2035 avg. demand = 600 Mtpa
450 Scenario 2014-2035 avg. demand = 475 Mtpa
$112 billion in potential high-cost capex outside China
(55% of potential non-China coal capex 2014-2025)
Potential thermal coal capital expenditures, 2014-2025 (billion USD)
Regional breakdown of potential export capex
$139 bn (78% of total) > $75/t breakeven threshold
Financial risks to 25-30% of brownfield thermal coal mines
‘Brownfield’ thermal capex (export and domestic)
Financial risks to 60-70% of greenfield thermal coal mines
‘Greenfield’ thermal capex (export and domestic) out to 2035
US domestic coal – risks to Appalachian producers
Potential US domestic capex over regional BECP threshold through 2025
US export coal – betting on selling PRB coal to Asia
Potential US export capex over $75/tonne BECP through 2025
60.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
40.0
30.0
20.0
10.0
Exports (lhs)
Source: EIA, CTI analysis 2015
Revenue (rhs)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
0.0
2002
Million tons
50.0
Billion USD
US thermal coal exports ↓ 40% from 2012
Australian coal exports – betting on the Galilee
$33 bn of potential Australian export capex > $75/tonne BECP through 2025
Indonesian potential export capex by company
$7.5 bn of potential Indonesian export capex > $75/tonne BECP through 2025
Key Takeaways
Global thermal coal demand peaks in 2016: Demand for thermal coal (globally
and in China) will peak as early as 2016 and then decline through 2035. US
demand declines at a 2% CAGR. Drivers are efficiency, renewables, and policy.
Prices < costs for one-third of potential production: Globally through 2035, onethird of potential production is above key long-term price levels of $53-75/tonne.
~80% of potential export capacity (including in US) looks uneconomic at estimated
price levels.
Excluding China, $112 billion in 2014-2025 financially risky potential capex:
Excluding China, high-cost production is associated with 2014-2025 potential
capex of $112 billion. Nearly half of this relates to development of new (i.e.
“greenfield”) mines for export markets.
Diverse company exposure to potential high-cost capex: Companies exposed to
potential high-cost capex include large diversified miners (BHP Billiton), major US
producers (CONSOL, Alpha Natural Resources), and Asian industrial conglomerates
Appendix
Arch
Peabody
Peabody
Cloud Peak
GLOBAL THERMAL COAL IN STRUCTURAL DECLINE
7000
2013-2020 CAGR = 2.9%
2020-2035 CAGR = 1.6%
6000
2013-2020 CAGR = 1.8%
2020-2035 CAGR = 0.6%
Global thermal coal demand (Mtce)
• IEA NPS assumes 18%
growth over next 22 years
• IEEFA forecasts absolute
decline of 2% from 2013
levels
• Global thermal coal will
peak by 2016, coinciding
with a peak in China’s
domestic consumption in
2016
• Seaborne thermal coal
demand will average
850mtpa to 2035, down
15% on current levels
• Energy efficiency, energy
security and renewable
energy are key drivers
5000
2013-2020 CAGR = -0.1%
2020-2035 CAGR = -0.1%
4000
3000
2013-2020 CAGR = -0.3%
2020-2035 CAGR = -2.7%
2000
1000
New Policies
0
2000
2005
2010
Current Policies
2015
Year
2020
450
2025
IEEFA
2030
2035
WHERE IEEFA DIFFER FROM THE IEA
• Lower forecasts for real GDP growth in China and India
• Long assumed life assumption for renewable generation
capacity
• Greater technology advances driving higher capacity
utilisation rates for wind and solar
• Greater capital cost reductions for onshore wind and solar
• Taxes at coal’s point of use have seen a material step up in
2014
• Faster removal of fossil fuel subsidies
• The US Clean Energy Plan is enacted largely as proposed
CHINA PEAKS IN 2016 BECOMING OPPORTUNISTIC EXPORTER
Energy security through diversity – power production to 2020
United States
Coal demand down 16% by 2020 on 2013 levels
• Coal’s share of power generation has declined from 49.8% in
2004 to 39.1% in 2013
• Energy efficiency to be scaled us significantly
• Addition of 39GW of wind power takes US installed base to
100GW
• Addition of 22GW of solar power takes capacity to 35Gw by 2020
• Gas revolution continues apace to substitute for coal
• These drivers combine with mercury and air quality regulations
and the US Clean Power Plan to close between 60GW-180GW
• US increases exports adding to seaborne oversupply
• Europe’s coal demand
set to fall by 24% on
2013 levels
• Large Combustion Plant
Directive followed by
Industrial Emissions
Directive are significant,
particularly in the UK
• Germany to move away
from reliance on
nuclear, thermal and
lignite
100
90
80
Other
Europe
Million tonnes (Mt)
EUROPE
70
60
Poland
50
Germany
40
30
Turkey
20
UK
10
0
2010
2015
2020
2025
2030
2035
INDIA does not materialise as the great white hope of the
coal export industry
A weak financial system and heavy subsidies can not support a low-making
power sector based on coal
Coal equities down 50% over last five years
Index Value (rebased to 100)
180
MSCI World Index
= 163
MSCI World
Energy Index =
149
160
140
120
100
80
Bloomberg Global
Coal Index = 49
60
40
20
0
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-1
30
Note: Bloomberg Global Coal Index encompasses 32 large coal producers.
Source: Bloomberg LP, CTI/ETA analysis 2014
$200 billion+ increase in net fixed assets since 2000 =
few opportunities for profitable new investment
200
150
100
50
China
US
31
ROW
Note: Data for 83 publicly-listed coal miners with
market cap above $200 MM; includes net fixed
assets related to metallurgical coal production
(estimated as 28% of overall cumulative total).
Source: Bloomberg LP, CTI/ETA analysis 2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
0
1990
billion USD (2012)
250
Combined capex of listed coal miners declined in 2013 –
but still 3X dividends + buybacks
$35
3x
$25
$20
6x 3x
$15
3x
Capex
Dividends + net share repurchases
32
Note: Data for 83 publicly-listed coal miners.
Includes capex related to metallurgical coal production (estimated as 25% of 2013 total).
Source: Bloomberg LP, CTI/ETA analysis 2014
2013
2012
2011
2010
2009
2008
2007
2006
9x
4x
3x
2005
2003
2002
2001
$-
4x 5x
11x 10x
2004
$10
$5
3x
3x
2000
USD billion
$30
3x
US coal: upstream concentration may enhance potential investor impact
% of total US coal production, 2013
Combined EV of Top 4 = $18.5 billion
% of total US oil production, 2013
Combined EV of top 4 = $853 billion
11%
46%
54%
Top 4 US coal
89%
Others
Top 4 US oil
Note: Top 4 US coal producers for 2013 were Peabody Energy, Alpha
Natural Resources, Arch Coal, and Cloud Peak Energy. Top 4 US oil
producers for 2013 were ExxonMobil, Chevron, ConocoPhillips, and
Occidental Petroleum.
33
All other
Note: Production totals on a volumetric (as opposed to energy-adjusted)
basis. Coal includes both thermal and metallurgical coal. Oil includes
crude oil, natural gas liquids, and condensate only.
Source: Bloomberg LP ,company reports, EIA, Rystad Energy CTI/ETA
analysis 2014
Appendix - Composition of Bloomberg Global Coal Index
CHINA SHENHUA ENERGY CO
YANZHOU COAL MINING CO
CHINA COAL ENERGY CO
NIPPON COKE & ENGINEERING CO
SHOUGANG FUSHAN RESOURCES GR
INNER MONGOLIA YITAI COAL
ARCH COAL INC
ADARO ENERGY TBK PT
ALPHA NATURAL RESOURCES INC
PEABODY ENERGY CORP
BUMI RESOURCES TBK PT
CLOUD PEAK ENERGY INC
CONSOL ENERGY INC
EXXARO RESOURCES LTD
GEO ENERGY RESOURCES LTD
HARUM ENERGY TBK PT
HARGREAVES SERVICES PLC
HEADWATERS INC
INDO TAMBANGRAYA MEGAH TBK P
JOY GLOBAL INC
JASTRZEBSKA SPOLKA WEGLOWA S
TAMBANG BATUBARA BUKIT ASAM
FREIGHTCAR AMERICA INC
SHERRITT INTERNATIONAL CORP
SEMIRARA MINING CORP
WHITEHAVEN COAL LTD
WESTMORELAND COAL CO
WALTER ENERGY INC
TAMBANG BATUBARA BUKIT ASAM
SEMIRARA MINING CORP
34
JIZHONG ENERGY RESOURCES
SHANXI XISHAN COAL & ELEC
CHINA SHENHUA ENERGY CO
YANZHOU COAL MINING CO
CHINA COAL ENERGY CO
INNER MONGOLIA YITAI COAL
GUANGZHOU DEVELOPMENT GRP
SHANXI LANHUA SCI-TECH
YANZHOU COAL MINING CO
YANGQUAN COAL INDUSTRY GRP
HENAN DAYOU ENERGY CO LTD
CHINA SHENHUA ENERGY CO
SHAANXI COAL INDUSTRY CO L
PINGDINGSHAN TIANAN COAL
SHANXI LU'AN ENVIRONMENTAL
CHINA COAL ENERGY CO
SDIC XINJI ENERGY CO
INNER MONGOLIA YITAI COAL
ADARO ENERGY TBK PT
BANPU PUBLIC CO LTD
PEABODY ENERGY CORP
BAYAN RESOURCES GROUP
CONSOL ENERGY INC
COAL INDIA LTD
EXXARO RESOURCES LTD
INDO TAMBANGRAYA MEGAH TBK P
JASTRZEBSKA SPOLKA WEGLOWA S
NEW HOPE CORP LTD
SUNCOKE ENERGY INC
WHITEHAVEN COAL LTD
25%
20%
15%
Coal global
avg. WACC =
9.6%
10%
5%
Balanced
Met
35
2012
2010
2008
2006
2004
2002
0%
2000
Return on Invested Capital
Returns trending toward or below cost of capital =
weak value creation
Thermal
Note: Data for 83 publicly-listed coal miners with
market cap above $200 MM; classified as
balanced/met/thermal according to revenue split
between thermal and metallurgical coal production.
Source: Bloomberg LP, CTI/ETA analysis 2014. WACC
estimate from NYU professor Answath Damodoran
using data from S&P Capital IQ.
US domestic cost curve
Emissions related to non-China potential highcost capex = 42 GtCO2: Pushing thermal coal
demand toward a 2°C trajectory will require
stronger policy action.
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•
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•
The underlying analysis in this report, prepared by CTI-ETA, is based on cost and supply data licensed from
the Global Economic Model of Wood Mackenzie Limited. Wood Mackenzie is a Global leader in commercial
intelligence for the energy, metals and mining industries. They provide objective analysis on assets,
companies and markets, giving clients the insights they need to make better strategic decisions. The
analysis presented and the opinions expressed in this report are solely those of CTI-ETA.