The Great Coal Cap

China’s energy policies

and the financial implications

for thermal coalLuke SussamsSenior ResearcherCarbon Tracker Initiative

Hong Kong, 5th June 2014

The role of China in the global coal consumption

The dynamics of China’s thermal coal sector are changing

Lowering power demand growth

Lowering competitiveness of thermal coal

Air pollution Water scarcity

Increasing competitiveness of non-coal power sources

Drivers Peaking China’s Thermal Coal Demand

Asset stranding from ‘early-peaking’ of thermal coal demand

However timing still debated with forecasts ranging from 2015 to 2030

Stranding of assets would entail financial consequences for market actors

great level of ‘asset stranding’ because the difference between the expected trajectory of demand on which investments were based and the realised pathway of lower demand and pricing would be greatest.

‘early-peaking’ scenario

Investors Policymakers

Coal-fired power capacity at risk of stranding with near-termpeaking coal demand

The report provides analysis to support a reassessment of exposure to assets with the greatest value-at-risk as a result of stranding

China has significant future supply that could be at risk from an early-peaking demand future.

Over two decades of proven coal supply

Over two decades of proven coal supply

Shanghai, Shenzhen and Hong Kong stock exchanges are potentially vulnerable to value destruction.

Over 80% of non-state owned assets attributable to companies listed on these exchanges.

Hong Kong Stock Exchange runs the greatest exposure.

Coal capital expenditure by stock exchange (CNY bn)

Identifying wasted capital expenditure (CAPEX)

Debt levels

Factors investors should consider when determining potential exposures

Coal quality

Geographic location

Political support

Revenue sources

Risks to the international coal market

Over the past 10 years, China has transitioned from being a net-exporter of coal to the largest net-importer globally and the biggest influencer on the

future demand and price of traded thermal coal.

Are they at risk of being left with excess supply?

Australian and Indonesian exporters heavily rely on China’s demand growth

‘early-peaking’ scenario

Recommendations

Investors

Policy- makers

Companies

Recommendations

Investors

• Require improved disclosures from coal companies with regards to future capital expenditure strategies in thermal coal sector and quality of resources and reserves.

• Ensure risk factors that determine resilience to lower demand are clearly and accurately factored into investment decision-making

• Implement effective risk monitoring processes to ensure timely response to market upheavals

Policy-makers

• Requiring stress-testing of banks and other financial institutions for potential on balance sheet exposure to stranded asset risk

• Financial market impact analyses of major environmental policies and developments to determine likely impact on financial institutions

• Set up a framework to assess risks to the future stock of financial assets

• International cooperation to enhance broader risk management of stranded assets

Recommendations

Recommendations

Companies

• Provide markets with information and analysis on potential exposures and resilience to the risk of stranded assets (Exxon, Shell, Total)

• Adopt more conservative capital spending strategies

• Stress-test the benefits of diversifying revenues sources from pure coal to a broader range of prospering technologies

Thank you.Luke Sussams

Senior ResearcherCarbon Tracker Initiative

luke@carbontracker.org

@carbonbubblewww.carbontracker.org