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'Alarm bells should be ringing' for coal companies and investors

New Carbon Tracker analysis highlights a spate of bankrupticies in coal sector as sign of things to come for fossil fuels.

More than two dozen coal companies in the U.S. have gone bust and others have lost 80 percent of their market in the past five years because of a potent combination of cheap gas prices, new air quality limits and increasingly competitive renewable energy technologies.

That is the conclusion of a new report by the Carbon Tracker Initiative (CTI) that argues the recent slump in coal prices is caused by a structural shift away from hydrocarbons that has caught the industry unawares, rather than by a temporary blip.

A series of bad signs

In the U.S., cheap shale gas has seen natural gas prices drop 80 percent since 2008, which in combination with falling costs of green energy has reduced coal's share of supply by 10 percent. Environment and climate laws issued by the Environmental Protection Agency has heaped further pressure on coal generators.

CTI said that in the U.S., some investors have been waiting for an upswing in the coal sector that has yet to materialize, even among emerging markets: coal consumption in China fell by nearly 3 percent last year and India has threatened to halt thermal coal imports in the next three years.

According to today's report, some companies have borrowed heavily in anticipation of the market improving and have suffered as a result. The report found that 26 U.S. coal companies went bankrupt in recent years, including James River Coal, which used to be a major operator in Central Appalachia and the Illinois Basin.

Between 2011 and 2013, 264 U.S. coal mines shut down, according to the U.S. Energy Information Administration.

'A seismic shift'

These are not new trends. Macquarie Research last week reported that "a wave of bankruptcies" in the coal sector is looming over the horizon, while last year, CTI reported that as much as $112 billion worth of future projects could be rendered uneconomic by similar trends of falling prices, low demand and environmental legislation.

Interestingly, those companies that have remained solvent performed far worse on the stock market than the rest of industry. Today's report highlights that the Dow Jones Industrial Average is up 69 percent during the past five years yet the Dow Jones Total Market Coal Sector Index is down 76 percent.

The only exception is CONSOL Energy, which has shifted dramatically away from coal towards gas, including buying Dominion Resources' Appalachian gas assets in 2010, CTI said.

Andrew Grant, CTI financial analyst and report co-author, said the study showed a "seismic shift" in energy markets. "The roof has fallen in on U.S. coal, and alarm bells should be ringing for investors in related sectors around the world," he said in a statement. "These first tremors are amongst the clearest signs yet of a seismic shift in energy markets, as high carbon fuels are set to be increasingly outperformed by lower carbon alternatives."

Mark Fulton, research adviser to Carbon Tracker and formerly head of research at Deutsche Bank on climate, said the report should act as a warning to investors on how climate change policies could affect share prices. "The collapse in the share prices of the U.S. coal sector 2011 to 2014 is an illustration of how markets can punish investors in a climate-constrained world where lower carbon technology is developing rapidly," he said. 

Infographic showing factors dampening demand for coal

A poor public image

Climate change campaigners and green businesses are increasingly focusing their attacks on coal ahead of a major international climate change conference in Paris at the end of this year, where countries will be expected to sign up to a deal to limit global warming to 2C.

The British Prime Minister's Climate Change Envoy Greg Barker repeatedly has argued that coal is the dirtiest fuel used in power generation and should be replaced with gas. In an article for Conservative Home this month, he argued that the next government will need to deliver a detailed plan to boost investment in gas.

"Since 2009 the U.K. has actually increased the amount of coal we burn by 6 percent. More than a third of our power still comes from this dirty fuel," he wrote. "Although there are new policies in place that will start to limit coal, investors would undoubtedly welcome greater certainty over when this will happen.

"While investment in U.K. renewables has surged in recent years and we are on track to hit our target of 30 percent of our electricity coming from renewable sources by 2030, the current abundance of coal in the system is clearly having a chilling effect on investment in the next generation of cleaner gas power stations."

Political antipathy towards coal has been further galvanized by the divestment movement encouraging cities, universities and other organizations to drop fossil fuel assets.

Coal vs. oil and gas

But the coal industry has started to hit back at attacks from the oil and gas industry, arguing that all fossil fuel industries will require carbon capture and storage technologies if they are to continue to thrive in a low carbon economy.

Andrew Mackenzie, chief executive of BHP Billiton, told the Financial Times this weekend that he believed gas companies were using climate change as a "marketing ploy."

"I am not against the trend, but come on — the last time I looked, there was plenty of carbon in methane and there is huge amounts of carbon in oil, and the carbon emissions from transport are just as much a problem as the carbon emissions from coal-fired power stations," he said.

As the divestment trend gathers pace, signs of infighting within the fossil fuel industry clearly are starting to emerge as each sector fights to prove to investors that it can thrive in a carbon-constrained world.

This article first appeared at BusinessGreen Plus.

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