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Paris Climate Agreement Spells Trouble For Coal

A global agreement reached at the recently concluded COP 21 climate change conference in Paris potentially spells trouble for companies associated with coal mining and transportation. Nearly 200 nations agreed on a plan that limits temperature rise as a result of global warming, to below 2 degrees Celsius or 3.6 degrees Fahrenheit from pre-industrial levels, in addition to “pursuing efforts” to limit warming to 1.5 degrees Celsius. Though the Paris agreement allows countries to set their own emissions reductions targets, it is the first global accord that requires developing countries to lower their emissions growth, in addition to emissions reduction initiatives undertaken by developed countries. This implies that large carbon dioxide emitters, such as China and India, will have to chart out a lower emissions growth trajectory than currently factored into their plans for economic growth. These countries are among the top global consumers of coal as well, with China topping the list. A lower coal-intensive global growth trajectory will negatively impact companies with coal mining operations such as Cliffs Natural Resources, Vale, and Rio Tinto, in addition to railroad companies such as CSX, Union Pacific, and Norfolk Southern, which transport coal.

Weakening Coal Demand and Pricing

The market for thermal coal, which is used in electricity generation, is currently characterized by an oversupply situation. Coal producers have expanded production over the past few years, betting on Asian demand for the commodity to absorb the increased production. However, global demand for the commodity has not risen at the rates that coal miners envisioned. China, the world’s largest consumer of thermal coal, is systematically shifting away from thermal coal as a fuel for electricity generation, as a part of its crackdown on carbon dioxide emissions, which began before the landmark Paris climate agreement. In addition, the Chinese government has also placed restrictions on thermal coal imports in order to protect domestic coal production. As a result of weak domestic demand and import restrictions, Chinese imports of thermal coal fell 38% year-over-year in the first eight months of 2015. With weak demand for the commodity, the worldwide surplus of seaborne thermal coal supply is expected to widen to 118 million tons in 2016, which is three times the surplus in 2013.

Seaborne Thermal Coal Surplus,Oversupplied coal markets have resulted in plummeting coal prices, which have driven the likes of Alpha Natural Resources, one of the largest coal producers in the U.S., into bankruptcy.

Impact of Paris Climate Agreement

With the signing of the Paris climate agreement, the demand for coal could decline at an accelerated rate, particularly since large emerging economies such as China and India will also now be limiting their respective growth in carbon dioxide emissions. To put the targets agreed on in Paris into perspective, emissions reduction pledges made by various countries prior to the conference would have resulted in global temperatures stabilizing at 2.7 degrees Celsius above pre-industrial levels. The Paris deal has shifted the target to 2 degrees Celsius above pre-industrial levels. The following figure illustrates the projected carbon dioxide emissions in the various scenarios. As per these projections made by the PBL Netherlands Environmental Assessment Agency, the Paris agreement would require a 25% reduction in carbon dioxide emissions from the current trajectory of carbon dioxide emissions by 2030, and nearly 35% below emission levels in a scenario where no emissions reduction pledges have been made.

source: http://www.forbes.com