BRISBANE, June 22 (Reuters) – Coal minerssupplying Asia's rapidly growing economies have plenty to be optimistic aboutas prices and demand appear robust, but they should be wary of getting caughtup in the positive feedback loop that nearly destroyed them before.
This week's inaugural Energy Mines andMoney conference in Brisbane, the heartland of the industry in top coalexporter Australia, was a sea of optimism about the outlook for the industry.
Prices have been on an upward trend sincebottoming in 2016 after five years of losses, and miners are once again makinggood profits amid strong demand from top importers China and India, newconsumers such as Pakistan and the reliable veteran buyers like Japan and SouthKorea.
But at the back of the minds of manyAustralian miners is the fear that they have seen this movie before, and theydon't want the same ending.
In 2012, the industry was cock-a-hoop overforecasts that pointed to massive import demand growth in Asia, led by Chinaand India.
Mining and coal conferences at the timewere well attended and featured masses of presentations from both junior andestablished companies, all with the common theme of how much they were going toinvest in new mines and how much new production was coming to meet the massiveAsian demand.
Problem was it was pretty much all wrong.
A well-respected industry consultant andforecaster boldly claimed in early 2012 that China would be importing 1 billiontonnes of coal by 2030, and India would be up to 400 million tonnes.
While this was probably the most bullishforecast, it wasn't terribly out of line with several other predictions.
But these forecasts now look hopelesslyoptimistic, given China's coal imports were 270.9 million tonnes in 2017. Whileimports have risen for two years, they are still well below the record 327.2million tonnes from 2013.
While China's coal imports may riseslightly this year, it's unlikely they will reach 300 million tonnes, and that1 billion tonne forecast looks well out of reach.
However, there is still no shortage ofoptimism among Australia's coal miners, with industry group the MineralsCouncil of Australia releasing a report this week that harks back to the wildlybullish forecasts of the previous boom period.
OPTIMISM VERSUS REALISM
Asian seaborne coal imports will rise by400 million tonnes from current levels by 2030, a more than 50-percent increasefrom 2017's 740 million tonnes, according to the report, which was compiled byconsultants Commodity Insights.
The methodology of the report assumes thatall planned and proposed coal-fired plants across Asia will be built, and thenalso relies on macro-economic forecasts.
However, the trend is clear, planned andproposed coal-fired generation keeps getting cut back as the developed worldlargely turns away from the fuel, and as top importer China increasinglytightens environmental controls.
In the two years to January there was a59-percent drop in announced, pre-permit and permitted coal-fired generation,according to a report compiled by environmental groups Coalswarm, the SierraClub and Greenpeace.
While the report also shows operatingcoal-fired generation increased by 4 percent over the two-year period, it doesseem clear that the pipeline of projects is slipping, and may in time not beenough to replace the closure of older power plants.
The optimistic forecasts also fail toaccount for political pressure to move away from coal, not only in China, butincreasingly in India.
It's likely that those countries planningon building coal plants powered by imports will also come under mountingpressure from environmental activists, who have become increasinglysophisticated in targeting how coal plants are financed and insured.
In fact, if there was another common themeto this week's conference in Brisbane, it's that the coal sector still doesn'tfully grasp that array of forces now being deployed against it.
The mantra of coal as 'cheap and reliableand the only way to electrify the masses of people still without power' wasstill repeated, and clearly believed.'Cheap and reliable and the only way toelectrify the masses of people still without power.'
But scratch a little further and minerswill tell you of the incredible difficulties in developing projects, withincreased government scrutiny and regulation, the rising threat of publicopposition and the dearth of financing, notwithstanding a seemingly large poolof investment funds.
The inability of India's Adani to actuallystart building its Carmichael mine in Queensland, the world's largest plannedmine aimed at supplying the seaborne market, plays on the industry's mind, asdoes the virulent public opposition to the mine's development.
The exit of major companies such as RioTinto from coal has also made developing new mines difficult, as those firmscould fund a project off their own balance sheets, and didn't have to seekinvestors, partners or project financing.
The lack of new supply also makesoptimistic demand forecasts tricky.
If Asia genuinely was to demand 400 millionmore tonnes of coal by 2030, it would take an unrealistically massive effort todevelop mines to produce this.
It simply can't be done, meaning thatprices would have to surge to either incentivise new production or cut back ondemand as power generators switch to other fuels such as natural gas, orincrease the use of renewables.
The Australian government's commodityforecasts are for modest growth in the region of 2 percent for coal output andexports, while Indonesia, the world's largest exporter of thermal coal, has apolicy of lowering exports over time in order to keep the resources fordomestic consumption.
With the world's two biggest coal exportersnot likely to boost their supplies to the seaborne market, the question is whocan? And the answer is nobody really.
South Africa also has domestic needs andexport infrastructure constraints, Russia has plenty of coal but infrastructureissues, and the United States and Canada could probably add several millionmore tonnes a year, but this would be nowhere near enough.
Overall, coal miners find themselves in theodd position of enjoying strong profits and growth in demand for theirproducts, but equally largely unable to meet that demand because developing newmines is becoming too hard.