Tighter regulation pushes miners to cut thermal coal exposure

Tue Dec 4, 2012 11:14am EST

* Coal use to slow as new regulation is introduced

* Tighter regulation adds to low coal production margins

By John McGarrity

LONDON, Dec 4 (Reuters) - Major mining companies are reducing their exposure to thermal coal as declining reserves, weak prices and tighter regulation erodes revenue margins.

BHP Billiton, one of the world's largest coal producers, said it would limit investment on expanding its thermal coal assets because of the environmental impact of burning coal in power stations.

BHP said that although developing countries would continue to be big users of coal decades from now, the fuel's share of the global energy mix would fall.

"Do you really think, in 30 or 40 years, that 42 per cent of the world's electricity is going to be generated with the incredibly carbon-inefficient coal? I think the answer is probably not," Marcus Randolph, head of BHP Billiton's coal and iron ore operations, said in emailed comments on Tuesday.

Coal is the world's top fuel for power generation as it is relatively cheap and abundant, but its share in primary energy demand is expected to fall in the longer-term as tighter environmental rules are introduced around the world.

"We have good assets in the (coal) business, but we're aware of the environmental implications. Developing countries want low-cost energy, but you can't deal with the carbon consequences over the long term," he added.

BHP's move follows an announcement by its rival Rio Tinto in November, in which the company said it would cut costs by $5 billion, mainly in the coal and aluminium sectors.

Analysts say the moves are a result of rising environmental costs that are eroding revenues generated from coal-fired power stations.

"Tougher environmental regulations on pollution in many emitting countries are likely to have as big an impact on coal miners as rising costs or weak prices," said Paolo Coghe, a commodities analyst with Societe Generale.

Coal mining revenues have fallen over the past year as low demand as a result of sluggish economic growth clashes with wage increases and rising equipment costs in producing countries such as Australia, Indonesia and the U.S., prompting mine closures.

Prices for thermal coal swaps trade around $97, down almost 30 percent since 2011.

TIGHTER REGULATION

In Australia, where BHP Billiton produces most of its coal, the government in July began taxing major emitters A$23 ($24.00) for every tonne of greenhouse gases they emit, and from 2015 users of fossil fuels will be forced to buy permits to cover carbon dioxide emissions.

In Europe, regulators will slash the number of permits that power generators will get for free through its emissions trading scheme from next year, reducing coal-fired power generation revenue margins.

The Large Combustion Plant Directive, a law that controls harmful emissions of soot and acid rain pollution in Europe, will force many older coal-fired power plants to close this decade.

Regulation is also tightening in the United States, where coal-fired power plants will be subject to tighter curbs on pollution from 2013, which together with competition from cheap shale gas could prompt the closure of around 30 gigawatts of capacity through 2020, the equivalent of around 30 standard-sized power plants, the U.S. Government Accountability Office said last week.

In Asia, booming China wants to reduce the carbon intensity of its economy by 45 percent by 2020 from 2005 levels, and the government is readying emissions trading schemes in seven cities and provinces.

FILED UNDER: