In simple terms, what is happening is that coal is winning where it counts: on the bottom line, the place where profits are reported.
Stanwell’s move to mothball a gas-fired power station and restart a coal-fired unit has stunned coal critics who fail to understand that all sources of energy have a price and coal is a clear winner in Australia, just as it is in most other parts of the world.
Three other developments will reinforce that point with Rio Tinto and BHP Billiton scheduled to file profit reports, and Whitehaven Coal doing what The Hog suggested last week by winning ever-stronger investment tips as investment banks crunch the numbers on a business enjoying the benefits of rising production and falling costs.
Stanwell first because while it was a bolt out of the blue for some sideline observers of the power generation industry, it was not a surprise to anyone who has been following the worldwide energy debate.
What the Queensland government-owned power generator did was make the same sort of hard-nosed business decision that has been made in Germany where power companies (and governments) are switching back to coal because they do not have any other choice.
The German situation has been reported here before but it essentially boils down to a country mothballing its nuclear reactor fleet after placing most of its eggs in a wind and solar solutions basket – which is not working.
The net result is that power stations burning brown coal, the worst polluter of all, are being fired up in a desperate attempt to hold down power prices, not just to help customers but to save entire industries threatened by the cheap power available in the US.
Stanwell is almost a mirror image of the German situation.
It found that it could make more money selling the gas it was buying under long-term contract into the east coast grid and reverting to generating electricity from coal.
Stanwell chief executive Richard Van Breda summed the situation up quite neatly when he said the decision was based on the high cost of complying with renewable energy targets, complying with the carbon tax and competing with subsidised rooftop solar power.
“These policies appear to have been implemented for ideological reasons with little analysis of the impact on electricity prices and economic growth,” he said.
Nothing could make the case for coal more clearly than what Van Breda said and what Stanwell Corporation has just done in opting to sell gas and burn coal in the name of higher profits.
Rio Tinto will be the next player in the coal sector to make news with the scheduled release today of its 2013 profit, which is likely to include a modest contribution from coal, but to be followed by forecasts of rising profits in this and future years.
A divisional breakdown of Rio Tinto’s expected result from UBS shows the company’s energy operations, which includes coal and uranium, contributing just $19 million on a pre-tax basis to last year’s results, but with the contribution rising to $70 million this year and then up to $159 million in 2015.
BHP Billiton’s half-year result, scheduled for release next week, is expected to show a recovery in coal profits with JP Morgan forecasting a pre-tax coal profit of $470 million, close to 500% higher than the $79 million earned in the first half of the 2012 year.
While coal’s contribution to both Rio Tinto and BHP Billiton will be less than some other divisions, especially iron ore, it will be more than aluminium or nickel – commodities hit even harder by price downturns than coal.
Therein lies the core issue of the coal debate. Like most other commodities it has been hit by a combination of over-supply and worldwide economic slowdown with those universal factors being compounded by poor government policy, which has encouraged high-cost renewable energy sources.
As was pointed out last week the coal worm has started to turn with profits recovering as demand rises and power generators address the question of what is the best and most profitable fuel for their business. The answer is coal.
