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The stampede to exit coal is a worrying harbinger for LNG: Russell

South32 is one of several major coal miners seeking to exit a business that has become increasingly problematic.
Image: Ian Waldie/Bloomberg

A global diversified miner paying to exit its coal assets, and a multi-bil-lion dollar investment by Qatar to reclaim its status as the world’s largest producer of liquefied natural gas have more in common than might be visible at first glance.

South32, the Australian commodity producer spun out of BHP Group, is effectively handing over up to $250 million to Seriti Resources to take South African thermal coal operations off its hands.

While it’s not unusual for sellers of mining assets to cover rehabilitation costs, the sizeable amount involved shows just how much South32 wanted out of thermal coal – and in effect, just how little the assets are worth.

South32 is one of several major coal miners seeking to exit a business that has become increasingly problematic amid action by environmental activists, concern among shareholders and the withdrawal of financing and insurance for mines viewed as contributing to climate change.

In short, coal mines, particularly those producing thermal coal for use in power plants, are increasingly seen as a millstone around the neck of diversified miners. The latter would prefer to focus on producing commodities seen as essential to decarbonising the world’s energy systems.

There isn’t a straight line between the rush to exit coal and Qatar’s $28.7 billion plan to boost its LNG capacity 40% to 110 million tonnes by 2026, with a potential second-phase expansion to a total annual capacity of 127 million tonnes.

On the surface, such a massive investment in LNG would seem to be a vote of confidence in the future of the super-chilled fuel, touted by proponents as a cleaner-burning alternative to coal.

Still, the LNG business is condemned by opponents as producing enough pollution to still be part of the climate change problem. And Qatar’s push to produce more LNG could be view through a more cynical prism: the Gulf nation may be seeking to maximise the revenue from its extremely low-cost natural gas assets while it still can – before decarbonisation does to LNG what it’s busy doing to coal.

Qatar is believed to be able to produce LNG at a break-even cost of about $4 per million British thermal units (mmBtu), below the $5 to $8 per mmBtu for new projects in Mozambique, Russia and the United States, and the $7 to $11 for current top exporter Australia for new projects, according to figures from the Boston Consulting Group.

This in effect means Qatar can afford to take the view that even if there is an oversupply of LNG in the future, it will be the last producer standing, and it can monetise its natural gas reserves better than its competitors.

This raises the possibility that the billions of dollars currently being invested in LNG projects in places from Mozambique to Russia to North America may end up facing the same issues coal has right now – writing down the value of assets and struggling to sell them.

Coal exit stampede

Of course, for buyers of distressed coal assets such as Seriti, the opportunity remains to run the acquired mines for many years and sell the coal profitably to South Africa’s state-owned energy utility Eskom.

The sale of South32’s South African energy coal assets to Seriti is expected to close before the end of the company’s financial year, pending government approvals and an agreement with Eskom over coal supply.

The planned sale was first announced in November 2019 with Seriti, a company owned by Black South African investors, initially agreeing to pay 100 million rand ($6.7 million) upfront plus deferred payments based on future cash flows until March 2024, with a ceiling of 1.5 billion rand per year.

These terms have now changed, with the deferred payments scrapped, the purchase price reduced to a token 1 rand and South32 agreeing to pay for rehabilitation and other costs.

If the deal does go through, it will be the latest coal exit by a major mining company, following plans by Anglo American to spin off its South African coal assets and exit from its joint venture in Colombia, something BHP is keen to do as well.

Additionally BHP wishes to sell, or spin off, its energy coal assets in Australia, and earlier this year cut the value of its Mount Arthur thermal coal in New South Wales state by up to $1.25 billion, reflecting the market view that such assets have plunged in value.

It’s possible the present rush for the exit from coal will be matched by major oil and gas producers making a similar dash to get out of LNG in a few years time.

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“It’s possible the present rush for the exit from coal will be matched by major oil and gas producers making a similar dash to get out of LNG in a few years time.”

It’s possible Kennith is an alien…

Kenneth wrote a whole article noting only MASSIVE investment in LNG and then speculates against it..

LNG and NG use will just grow. There is no way the wolrd will be able to get away without it.

Aussie coal market is a highly organised and regulated market.Aussie coal is to be bought by PRC,only for very high quality Coal in terms of UHV/Kcal.A bulk of the CIFFO rates of Aussie coal for PRC,is sea freight,in Break Bulk Ships.Even with deep draft ports,and even if Chinese ships are used on Time Charters – sea freight,is s a waste.

Therefore Aussie high grade coal,is to be used for high value added super critical applications, in PRC. Every ton of High Grade coal,is also a Call Option,to buy lower priced coal,and lower graded coal,for blending options,to reduce cost at point of usage.dindooohindoo

However,this is the time for the PRC to make acquisitions (in Africa and Borneo etc.) and long term contracts with Nil Call Option premiums.At this point,committed quantity contracts,will provide solvency and bank loans,for coal mines. Hence,there will be Nil Option premiums loaded into the coal pricing contracts for medium term purchases.

When coal prices boom,the PRC can mine the highest cost first,as a stripping strategy – with the strategic objective of bargaining with large coal suppliers,for residual coal supplies.This option is NOT there for the Koreans and Japanese.Of Course, the Koreans have their own bag of tricks.

Hence,the Aussies and Indonesians can price gouge the Koreans and Japanese (as they have no strategic mining reserves),and the PRC can avail of some of this price gouging – when it does its acquisition of coal,from the Aussies.Aussies price gouging on the Koreans,will work only if PRC mines acquired in Africa,do not flood Nippon,and so,the Aussies have to pay a toll to PRC,for the price gouged by the Aussies,from the Koreans and Japanese

After stripping the high cost coal – the Chinese coal suppliers can easily raise,VC or Bank capital.

When coal prices and freights are low – as it is,at this instant,it is better to do spot pricing – as the suppliers have no bargaining power.There is only a supply chain risk,due to production and logistics bottlenecks.

In these times there is no need to invest in building up infrastructure,as lack of infra,can be used to hammer down coal prices at rake point or the mine pit head.Indonesia is an example,which gets the highest FOB rates for exports to PRC.Small unorganised mines in Borneo,Sumatra,Java sell coal at less than half the FOB rates,as they want cash down payment,at mine pit head.

Cash = CASH.

This state is due to the poor infra in several areas.Hence poor infra can be used to buy coal at less than 40% of the FOB rates.Thereafter the coal is to be carted to the port.Hence,the aim is to keep the unorganised coal miners,as vulnerable as possible.

Ideally,PRC can set up a bank which can discount export documents,at coal mine pit head with Multimodal Bill of Lading,with a chinese company managing and coordinating the rakes and trucks,to the port,and the loading of the ship,at outer anchorage,via barges.

The Chinese companies can pay the miners in Cash.Generally,in Africa and Indonesia,the Military provides the security to the logistics movement,for a fee,of course.

Aussie mining is highly organsied and regulated and so,is very expensive.

In any case,wherever PRC is using coal for thermal power,for base load requirements,it can offset the coal with Nuke Power or Gas/Naptha.Super critical applications of coal,for PRC,are for those industries,where Coal is a RAW MATERIAL,and the quality and coal specifications,are stringent.

Indonesia is a good option for PRC,as the nation is run by Chinese.80% of the companies on the JKSE are owned,managed or controlled by chinese.The Indonesians know that their nation cannot defend its islands from the PLN.It is a Muslim nation,which is NOT likely ever to be a part of the QUAD.Most importantly,the nation relies on resources exports – and has no viable domestic manufacturing industry. Indonesia does NOT need coal,as it has geo thermal power,but not the skills or the money,to tap it.

Hence,it has LOW political risk at present – but,in the future,if the economy fails (which it will),demagogues will take over and ruin the economy further (but will uplift the poor).

Indonesia has history with Australia,and Aussie int has many spies in Jakarta,and the Aussies also supported and still supports,the separatists who want to secede,from Indonesia.

Aussies have to export coal in the form of power or urea or urea in agriculture.Exporting coal,per se,is not a viable option.Reduction in Chinese demand will also impair pricing power with the Japanese/Koreans and other buyers.There is some serious problem in the Aussie coal policy.Adani an Indian company fronting for Narendra Modi,is mining coal from Aussie and exporting it to India for power generation.So all the poison is left in Aussie land,and the real value addition in the coal value chain,is done in India,and the profit on that value addition,is not taxed in Aussie.Besides,the coal is sold by Adani Australia to Adani India,at a discounted rate.

What does that prove ? It means that the Aussie state could not convince any Aussie to do some value addition in Aussie land on that coal,to earn ANY PROFIT on the value addition (as the profit from power generation in India,is not taxed in Aussie land) This is AFTER considering the SEA FREIGHT,on the coal exported by Adani to India.

If that is the state of affairs – then the Aussie coal sector is doomed.The beauty is that Adani is generating power in India – and India is POWER SURPLUS and the power tarriffs for coal is 5-7 cents (on the USD). With captive coal and iron,if Aussies CANNOT add value to the Aussie coal – then the Aussies are in serious trouble.Someone might ask,Y Aussies did not offer 6 cents/Kwh for power sold from the power plant of Adani in Aussie land.

End of comments.

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