Rio recently announced that it is selling several Hunter Valley mines to Chinese owned Yancoal, in a deal worth AUD$3.2b. These mines happened to all be thermal coal producers.

With this fresh announcement, we thought it would be worth discussing what the future of the coal industry might look like.

Firstly, we need to distinguish between the two primary uses for coal:

  1. As an additive in the production of steel
  2. To act as fuel source to heat water into steam, which then powers turbines. I.e. coal fired power stations

The first use for coal is known as coking. As most infrastructure and urbinisation requires large quantities of steel, there is relatively stable world market for coking coal. Coking coal also known as metallurgical coal, it is a higher grade of coal with less impurities. Not all coal seams and coal mines can produce coal of this quality.

The second use of coal is known as thermal coal. Thermal coal, of a lower grade due to the higher amount of impurities, is primarily used in firing power stations.

The market for thermal coal has potentially peaked with jobs in coal mining in Australia reaching their peak about five years ago.

Rio’s decision to sell its thermal coal operations comes on the back of suffering substantial losses in writing off thermal coal operations elsewhere (mainly Africa).

Rio now retains two small coking coal operations in Australia. Given the lack of scale these mines provide, it may even sell its coking coal mine operations soon.

On a bigger picture;

  • India has announced that they have no intention of building any further coal-fired power stations in the next 10 years.
  • Chinese government is positioning itself to cease thermal coal imports
  • Chinese government is also looking at suspending any further coal fired power station developments
  • Renewable energy sources are doubling each year in their contribution to power consumption
  • There are more solar workers in the US than there are in oil and gas. More here

As there is a lag associated with converting economies to renewable energy consumption, there will be a sustained medium term market for thermal coal. But, with ever improving efficiency gains in renewable energy production, the long-term future of the thermal coal mine is bleak. Banks, always looking for a business to lend too, are very cautious on any exposure to a thermal coal or coal fired power station.

In a significant trend that will continue to play out, thermal coal, the supporting infrastructure and the communities that are supported by these mines, will be facing a slow but steady declines over the next generation and beyond.

The above industry theme is something we think you should be considerate of when when making your own long term investments.

By Matt Vickers CPP

Principal Adviser at Snowgum Financial Services

Snowgum Financial Services Pty Ltd (ACN 603 703 859 is a Corporate Authorised Representative (Corporate ASIC AR number 001001581 ) of Peter Vickers Insurance Brokers Pty Ltd (Australian Financial Services Licensee (AFSL) No 229302 & Credit Licensee (ACL) No 229302 ǀ ABN 68 074 294 081).

Any advice contained in the article is of a general nature only and does not consider your circumstances or needs. You must decide if this information is suitable to your personal situation or seek advice. Prior to investing in any product, you should read the Product Disclosure Statement.