The recent slump in coal prices has taken many by surprise.
Indeed, the president of coal at BHP Billiton Limited (ASX: BHP), Mike Henry, was reported as saying, "When I started in the business at the beginning of the year, I was not expecting prices would come off by 20-25 per cent."
However, this doesn't surprise me at all. Because there's one huge myth about coal that tends to distort many people's forecasts.
The myth is that demand for coal will "remain strong for decades to come."
And the fact is that this myth could result in big losses for those who invest according to the myth — and that may even include you, depending on where you superannuation is!
That's because some projections — certainly those required to justify new coal mines — peer 20 years or more into the future. That requires the use of a far more powerful crystal ball than I possess.
But those commentators should have good reason to question their crystal balls. After all, the facts, stats and evidence, increasingly indicate that demand for coal will not be strong "for decades to come." If anything, demand for seaborne coal may be approaching a peak within a decade.
For example, analysis suggests China's total coal consumption was down about 5% in the second half of calendar 2014, compared to the prior corresponding period. And that's despite the fact that total energy consumption grew by 1.3%.
"But what about India?" goes the refrain, "India will take our Australian coal, of course it will."
I'm not joking when I say I've heard market commentators argue that if India had coal reserves they could use, they'd be using them already. Such circular reasoning is unconvincing when the Indian Energy Minister said in May that: "We are confident that in the next year or two, we will be able to stop imports of thermal coal."
Of course, India is already increasing its own coal production. In the 6 months since April, Indian coal production is up 11.9% year over year.
More generally, the refrain-of-last resort for the coal companies and their followers is that some developing country somewhere (as yet unidentified) will definitely want more of our coal.
Because you know, coal relieves poverty. Right?
Wrong.
To quote those tree-hugging radicals at the World Bank: "We need to extend access to energy to the poor and we need to do it the cleanest way possible because the social costs of coal are uncounted and damaging, just as the global emissions count is damaging as well."
The truth is that if all the people in the world who need electricity were connected to a coal powered grid, respiratory illness would go through the roof. The truth is that that course of action would be enormously expensive anyway, because many of the people who lack access to electricity also lack access to the grid.
To quote a recent report from Carbon Tracker:
"[The] amount of extra [coal] generation [required to achieve universal electricity] could be offset by India and Sub-Saharan Africa reducing distribution losses by one third. We also expect further improvements in energy efficiency to erode demand for coal. At least through 2030, it is therefore inappropriate to suggest that achieving universal electricity access will require a substantial increase in demand for coal-fired electricity."
The Bottom Line Is That Uncertainty Abounds
I don't need to prove that coal demand will peak by 2020, or that it will definitely weaken in the next couple of decades.
What I'm arguing — and have shown — is that there is a lot of uncertainty about demand for coal in the coming decades.
Sure, there will be ups and downs in demand for coal over the coming decades. Sure, some speculators will make money punting on coal stocks. But if you're a long term investor, buying shares in most coal companies is a long-odds bet based on the forecasts of a broken crystal ball.
Worse still, it's also a bet on a world with higher rates of asthma, more prime farmland destroyed by coal mining, and unnecessarily severe climate change.
The kicker is that if you haven't taken control of your super, there's a chance your superannuation is invested in coal right now. As a nation, we do ourselves no favours doubling down on coal, when the world is moving away from it.
