Freight Rail

What now for Old King Coal?

COMMENT: A few months ago, coal seemed to be on the nose – it still is – but with the recent jump in global prices and mothballed mines re-opening, the champagne corks appear to be popping once again in boardrooms around the world, Mark Carter writes.

Bulk coal movements account for around half to two thirds of the revenues of our three largest rail freight operators and arguably the pursuit of further coal dollars often deflects their attention from lesser traffic flows.

Throughout the first decade of the 21st Century and continuing post Global Financial Crisis, Australian coal closely followed iron ore in leading the mining development boom with a phenomenal growth in exports.

But over the last couple of years, while tonnages have remained high, things have started to slow down and a new set of dynamics is starting to emerge, in fact in Europe and the US these are already emerging, that challenge the ‘civilizing’ benefits of coal.

Government action on carbon emissions and a rapidly escalating shift to renewable energy is starting to have an impact around the globe and the question is, how long before these changes start to catch up with Australia?

I’ve highlighted before in previous columns that I’m not convinced that our major rail operators in Australia are taking these changes seriously and starting to position their businesses for the post-coal era.

It’s not that it will happen tomorrow, but the winds of change are blowing strong and show no signs of abating.

We saw some token words around a year ago from Aurizon that it might shift some its focus away from coal to its intermodal and general freight business, though little seems to have happened since then.

In fact with the sudden rapid upturn in prices for metallurgical (coking) coal in the last few months and softer upturn on thermal coal prices, Aurizon appears to be quick in jumping back on the coal bandwagon.

Whether we are witnessing a full on coal revival or this is just a ‘dead cat bounce’ remains to be seen.

Coal represents 68% of Aurizon’s revenue and outgoing Aurizon MD, Lance Hockridge was recently quoted as saying, “We believe Aurizon’s assets are well placed to serve continued demand for Australian coal as demonstrated by the steady increase in Australia’s coal exports since 2010.”

According to Aurizon over one billion additional people in Asia will gain access to electricity by 2040 while an additional two billion will double their current levels of per capita consumption.

Acknowledging that a greater share of investment in Asia will go towards renewable energy capacity, the operator still expects coal-fired generation in the region to increase 43% in absolute terms by 2030, though not everyone agrees with that position.

Current coal volumes suggest that growth is currently stagnant. Aurizon’s coal task decreased 2% to 206.8mt in FY2016 and little or no growth is anticipated in 2016-17.

Pacific National volumes were down 2.5% from 162.8mt to 158.8mt for the year with increased tonnages in Queensland, but lower volumes in the Hunter Valley.

Coal exported through the Port Of Newcastle was virtually static in FY2016 when compared to FY2015.

Lloyds List Australia recently highlighted a report by energy market analysts Wood MacKenzie that predicts that measures aimed at limiting global average temperature rise to two degrees Celsius will further dent Australian thermal coal exports.

The report predicts a 40% fall in the international thermal coal trade as the result of the formal ratification of the COP21 Paris climate agreement. While Australia would be impacted less than most of its competitors, due to higher quality of its coal, the prediction is that exports will decline 35% by 2035 from current levels.

That’s 20 years off, so I can imagine many will be saying “why worry?”, but there is additional disruption afoot that may well bring that scenario forward, maybe by up to a decade.

In Europe, Genesee & Wyoming Inc’s (GWI) Freightliner subsidiary has seen its coal haulage task drop by around 55% over the second and third quarters of 2016 as the result of changes in the energy market and government policy.

In North America, GWIs carload figures for the same period show a large, though less dramatic, drop of around 19%. Greater pain is being felt by other US railroads with BNSF recording a 24% drop in coal carloads (year to date) as at the beginning of November.

The rise of renewables is also having an effect and is partially being blamed for the closure of coal fired power stations in Australia such Port Augusta and Hazelwood.

In Europe they are way ahead of us and a few weeks ago Netherlands Railways announced that all electric trains on the Dutch network will operate exclusively using power from renewable sources effective 1 January 2017.

The Swedes are going the whole hog with a target to run the whole country on renewable energy within the next 25 years; last year, 57% of Sweden’s power came from renewables.

And in the middle of writing this article the International Energy Agency released a report which says that a dramatic shift to renewable energy is underway in China and India.

Its World Energy Outlook Report estimates that China’s coal use is likely to have peaked in 2013, which could have significant ramifications for Australia.

Coal still generates 84% of all electricity in China in 2014, though the IEA’s current policy scenario forecasts that market share is going to drop down to 54% by 2040, although a more aggressive scenario actually has coal dropping to 26% market share by 2040.

Uncertainty is the new order. While there is supposedly a regulatory degree of separation of costs between the coal task and other aspects of rail freight industry, there is no doubt that the coal business provides the industry in Australia with significant economies of scale.

Whether the end of coal is ten years away or twenty years away, collectively the industry needs to be instigating research now to chart its longer term survival beyond these dates and beyond coal.