Coal's days numbered as renewables attract bonds

Coal bond prices fell by 17% in the second quarter. (Paul Botes, M&G)

Coal bond prices fell by 17% in the second quarter. (Paul Botes, M&G)

Coal is having a hard time lately. United States power plants are switching to natural gas, environmental restrictions are kicking in and the industry is being derided as the world’s number one climate criminal. Prices have crashed, sure, but what’s happening in the bond market offers a real sense of coal’s diminishing prospects.

Bonds are where coal companies turn to raise money for such things as new mines and environmental cleanups.
But investors are increasingly reluctant to lend to them. Coal bond prices tumbled 17% in the second quarter, according to an analysis by Bloomberg Intelligence. It’s the fourth consecutive quarter of price declines and the worst performance of any industry group by a long shot.

Bonds fluctuate less than stocks, because the payoff is fixed and pretty much guaranteed as long as the borrower remains solvent. A 17% decline is huge and it happened at a time when other energy bonds – oil and gas – were rising. Three of America’s biggest coal producers had the worst-performing bonds for the quarter:

  • Alpha Natural Resources: -70%;
  • Peabody: -40%; and
  • Arch: -30%.

Coal powered the Industrial Revolution and helped lift much of humanity out of poverty, but its glory days are ending. Four of the biggest pressures facing coal today are:

  • Changes in the US grid: About 17% of US coal-fired power generation will disappear over the next few years, according to an analysis by Bloomberg New Energy Finance. Obstacles include age, the abundance of cheap natural gas and new Environmental Protection Agency (EPA) rules to cut pollution.
  • Coal plants will be on the way out by 2020: Coal won a small victory over the EPA’s new mercury restrictions in the US Supreme Court in June, but it’s probably temporary.
  • Even China is approaching peak coal: The biggest power investments are now happening in renewable energy, but fossil fuels will be with us for decades to come. The global burning of coal won’t peak on a global scale until about 2025, according to Bloomberg New Energy Finance. But that doesn’t indicate a thriving industry. Even China, the world’s biggest consumer of coal, wants to be rid of it. While China’s electricity demand will soar in the coming decades, its coal use will remain relatively flat, peaking by 2030 and then declining, according to Bloomberg New Energy Finance. The pollution is too thick and the alternatives too cheap for coal to flourish.
  • Wind and solar will win the price war: The declining prices of bonds is a huge problem for US coal companies. When bond prices fall, the cost of borrowing money goes up. And coal needs more money. Coal companies are allowed to avoid costly insurance premiums by showing they have the capital to clean up after themselves. It’s called self-bonding. This year the US federal government has started taking a closer look at whether the struggling coal companies still qualify. Coal is an industry in terminal decline; financial markets reflect this new reality. Drastic new energy policies are still needed to avoid catastrophic climate change, according to nearly every credible analysis. But even setting aside the environmental and health issues, renewables are on a trajectory to outcompete fossil fuels, starting with coal. Between now and 2040, two-thirds of the money spent on adding new electricity capacity worldwide will be spent on renewables, according to Bloomberg New Energy Finance.

In the past year, global stock prices for coal companies are down almost 50%, but it’s in the bond market that coal is really getting hammered. The focus of energy finance has shifted from coal to renewables, and it’s not likely to turn back. – © Bloomberg

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