Coal play still a big deal

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??This week: The idea that coal assets will become stranded – and businesses should therefore stop investing in them – hasn’t really materialised in Asia.

That is why Geo Energy Resources has just agreed to pay US$154 million for significant stakes in Indonesia-listed coal miner Golden Eagle Energy and coal infrastructure developer Marga Bara Jaya. The deal will trigger a public offer from Geo Energy for the rest of Golden Eagle Energy that it does not hold, which means Geo Energy might have to pay even more to own up to 75 per cent of Golden Eagle Energy.

A deal like this seems to go against the “stranded asset” thesis for coal. The thesis posits that carbon-intensive assets, among which anything related to thermal coal is near the top of the list, will become illiquid as the world seeks to avoid the worst of global warming. It’s an important argument that is widely cited to shift capital away from climate-unfriendly assets and positions.

But it’s hard to argue that coal in Asia is stranded when a listed company such as Geo Energy is willing to pay a premium of 12 per cent for a coal mine with a remaining life of about 20 years. Moreover, there is nothing in Geo Energy’s statements on the deal to suggest the company is worried about stranding.

The biggest hurdle to cutting off investments in coal in Asia is that demand for the fuel is still robust. Coal consumption in the region has been growing, and is not expected to peak until around 2025. Even then, the post-peak outlook is shaped more like a plateau than a cliff.

It’s not as if Asia isn’t investing in renewable energy. The problem is that overall energy consumption is expanding rapidly as well, along with population and economic growth. For example, Vietnam’s PDP8 power plan aims to put the country on a sustainable energy footing. The plan calls for coal’s share of the national power output to fall from the 31 per cent currently to 20 per cent by 2030; but because total output will be higher in the new decade, coal power output is expected to increase to 30 gigawatts by 2030 from 21 GW in 2020.

Under these conditions, coal doesn’t seem like such a bad investment.

Access to capital is not that big of a concern, either. One of Geo Energy’s principal bankers is Singapore-based UOB. UOB has pledged not to finance any new projects related to coal-fired plants and thermal coal mines, and to fully exit financing for the thermal coal sector by 2039.

That has not been a problem for Geo Energy, which has turned to Indonesia’s Bank Mandiri for US$220 million in facilities to help fund the acquisition.

Bank Mandiri says it is committed to provide sustainable financing to support the transition to a low-carbon economy, but it does not have a plan to transition away from coal. Even if Bank Mandiri eventually decides to stop financing coal, Geo Energy should have no shortage of willing lenders. Only five South-east Asian banks are currently members of the Net Zero Banking Alliance, and they are all from Malaysia and Singapore: CIMB, DBS, Maybank, OCBC and UOB.

Carbon pricing, such as carbon taxes, could help level the playing field for renewable power. But progress has been slow in South-east Asia, and it remains to be seen whether governments are willing to impose prices that are high enough to change behaviour.

Until more sustainable alternatives can generate enough power to replace coal and do so at competitive prices, demand for coal in Asia will continue to exist.

?? Top ESG reads:

1. OCBC has named Mike Ng, who heads the sustainability office for wholesale banking, as its first ever chief sustainability officer.
2. Ethics and compliance firm LRN finds Singapore-listed companies have the most ineffective codes of conduct.
3. Transition finance in South-east Asia needs more regulatory and standards certainty, says Barclays sustainable finance head Daniel Hanna.?
4. Sustainable bond structures are the go-to instruments for asset managers who are raising capital to help meet net-zero targets, says NatWest.
5. Food companies should buy “nutri-credits” to offset unhealthy grub that they peddle to consumers, says columnist Merryn Somerset Webb.

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