Profiting from the unburnable coal campaign

EASY to dismiss as propaganda, the claims by anti-coal movement that 80% of the world’s coal is “unburnable” triggered a thought that Hogsback would like to share, because while the unburnable claim annoys most people in the coal industry it contains the roots of a terrific investment idea.

Tim Treadgold

Two assumptions are required before getting to the heart of the matter.

Firstly that the 80% unburnable claim is correct, and secondly that most of the world’s governments sign up later this year at the next global climate summit to enforce strict new emission control rules on their power sectors.

That first assumption will prove to be a nonsense because while the advanced Western world with its comfortable, electric-powered homes and offices, might like to think that coal is yesterday’s fuel that’s not the case in the fast-growing Third World where most people live and dream of a better lifestyle – which means increasing demand for electricity.

The second assumption about governments enacting stiffer environmental protection laws is a more likely event because some countries, such as China, have become appallingly polluted.

So, if unburnable and tough new laws kick in what’s likely to happen – given a third element in this scenario and that’s the trillions of dollars invested in coal-fired power stations around the world.

Are all those power stations going to be closed overnight? Not likely, because if that happened it would cripple the global economy and no one wants that to happen, not even the darkest of dark green environmental campaigners.

A more likely development is that tough new pollution control laws will force power stations to burn only the highest quality coal with the lowest levels of pollutants.

As the coal-fired power stations of the world are forced to buy the best coal the 80% unburnable campaign will also be heating up with governments not only banning the use of dirty coal, but possibly banning the mining of it in the first place.

This is when we reach the “k’ching” point in these idle thoughts from a sometimes deranged mind because there is so much capital sunk in the coal-fired power station industry that operators will be forced to use the best coal, and that’s when scarcity becomes a factor.

For non-economists trying to follow The Hog’ line of thought economics was once defined as the study of scarcity based on the fact that people might have unlimited wants while there are limits to available resources – and that means whether it’s a natural limit, or a government imposed limit.

Whatever the cause of the limitation when any resource moves from over-supply to under-supply the first result is a rise in the price.

Coal could be heading towards a period of supply limitation through government action, but with demand remaining strong thanks to economic growth.

If, for example, new laws are introduced specifying what type of coal can be burned in power stations there will be a stampede to source supplies of that coal forcing up the price.

And if the unburnable brigade convinces governments that vast amounts of coal should be left in the ground then the price effect could be even more dramatic because of demand from existing power stations.

Critics of these thoughts from The Hog are welcome to pick holes in the argument but they should also appreciate that stranger things have happened when governments get involved with economics.

Tobacco, for example, went through a similar process of public denouncement on health grounds until governments eventually introduced a series of bans and limitations, including no smoking in public places and no advertising.

The no smoking bans have had a limiting effect on the use of tobacco, but the no-advertising ban has had a spectacularly perverse effect – tobacco companies are more profitable than they have ever been because reduced sales in some markets has been offset by the removal of advertising costs.

What was introduced as a public health drive with the best intentions has had precisely opposite effect when it comes to the profitability of tobacco companies, ensuring their long-term survival and even their expansion.

Coal is entering the same sort of situation as tobacco, pilloried by opponents but meeting the demand of society for reasonably priced electric power.

What happens if the 80% unburnable campaign gets its way, and governments impose quality limits on coal is both predictable and potentially profitable.

Canny investors will recognise that coal is not going to disappear because of government edict or public campaigns but a situation could arise whereby high-quality coal commands a much higher price and low quality coal drops into the unburnable category.

The trick will be to identify who’s got the best coal, and load up your investment portfolio before governments act and then watch the share prices fly.

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