When will coal be phased out in Australia? And what will this mean for ASX coal and energy stocks?

Nick Sundich Nick Sundich, April 16, 2024

When will coal be phased out in Australia? It is inevitable that coal’s days are numbered, although the Russia-Ukraine war temporarily led to a new boom in the market given high prices. And Australia still has 21 gigawatts of energy produced by coal annually.

On a production basis, Australian hard coal production grew from 348Mt to 420Mt over the 2010s, a growth rate of 1.9% per annum. Even today, it is used in 64% of domestic energy production, 32% of total energy supply and 53% of electricity generation.

At the same time, we cannot shy away from the fact that the reprieve was only temporarily and the demise of coal is on its way. But just when will this happen? And what will happen to companies reliant on coal, from coal miners to energy providers?

 

When will coal be phased out in Australia?

Most likely in the mid 2030s. The largest coal-using state (Queensland) and the biggest energy producer (AGL) have both pencilled in 2035 as the date on which both will end their reliance on coal. AGL plans to shut Long Yang in that year, which provides 30% of power to the state of Victoria. Another projection is from the AEMO, which forecasts coal to be retired by 2038.

But it won’t be a case of everything operating until such a year in the mid 2030s and shutting down simultaneously. Facilities will gradually close over the next decade – for instance, the Eraring facility in NSW will close next year. And the federal government is targeting 80% renewable energy by 2030. And many coal producers may have no choice, with banks and insurers beginning to sever ties with the coal sector, because they do not see a long-term future.

It goes without saying that’ll involve a fair proportion of coal production going offline in the next 6 years or so. Indeed, AMEO forecasts that 90% will be gone by 2034-35.

 

What will this mean for coal and energy stocks?

Simply put, they’ll need to ‘adapt or die’. In other words, find new sources of energy from renewable resources. With capital costs likely to be in the tens of billions, many will need to get cracking now.

Turning again to AGL, it is mulling investments of up to A$20bn in renewable energy by 2036. This would be ~$1.8bn per year, 32% more than the company’s FY23 EBITDA.

From a broader economy standpoint, Australia will need 6GW of grid-scale renewable capacity every year for the next decade, well ahead of the 4GW the country is currently rolling out. Progress is being made, no doubt, but not enough.

 

What about coal miners?

We believe diversified companies like BHP should be OK. We are less certain for pure-play companies like Whitehaven, especially companies that are ‘doubling down’ and investing in coal. Again, we’re looking at Whitehaven, it bought BHP’s Daunia and Blackwater mines last year. It has company, however, so far as coal backers are concerned. Stanmore Resources is looking to spend over $200m to buy out South32’s interest in the Eagle Downs coal project.

Glencore last month formally withdrew a promise to keep annual coal production below 150Mt. Its justification? It was reducing thermal coal production anyway, in favour of coking coal – which it thinks is less harmful to the environment than thermal coal.

 

Conclusion

Obviously it doesn’t mean anything to the pureplay coal producers that diversified miners are selling? They get the cash and can phase out coal with minimal impact. Judgement Day is coming eventually, and something will have to give.

 

 

Investors in coal companies without a long-term plan should sell out. Sure, there might be one or two more years of good dividends, but shareholder value can be wiped out far faster than it can be created. Coal is on the way out, and coal producers need to prepare for that eventuality.

 

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