Assessing the investability of thermal coal over the next 20 years

Abstract

The demand for thermal coal has risen dramatically over the past 20 years, driven by an emerging markets-led commodities super cycle, which has recently come to an end. Today, thermal coal generates over 40 per cent of global electricity and is available in large quantities in countries such as China, India and the USA. Thermal coal is also the primary contributor to CO2 emissions, a substantial driver of climate change. This has resulted in material tension for ‘sustainable and responsible’ institutional investors and strategic challenges for certain state-owned companies. Deciding upon the electricity generation technology in which to invest poses a significant dilemma. Thermal coal is abundant and by far the cheapest when externalities are not internalized. Electric renewables currently suffer from intermittency, viable storage solutions and are not very scalable. While cleaner than thermal coal, natural gas is abundant yet often needs to be imported and is more expensive than thermal coal. Although safe, scalable and clean from an emissions perspective, ‘new’ nuclear energy suffers from perception problems. The mixed method inductive methodology was used to determine the extent to which thermal coal remains investable over the next 20 years and has led to two divergent yet plausible scenarios impacting thermal coal investability. In assessing the investability of thermal coal across four chief stakeholders and geographies, a multifaceted interpretation of the term ‘investability’ is developed, which recognizes disparate financial and non-financial investment drivers. The research shows that thermal coal remains investable by a variety of stakeholders, particularly in the Transformative scenario, but their reasons for investing differ materially both by geography and the type of stakeholder. Finally, the key drivers for both scenarios are identified that can be monitored and used as an early warning system to inform investment decisions.