The latest research from the University of Oxford’s Stranded Assets Programme will be published on Monday 16th December.

The report is entitled, Stranded Down Under? Environment-related factors changing China’s demand for coal and what this means for Australian coal assets.

The project was commissioned by HSBC’s Climate Change Centre of Excellence. 

“China’s demand for coal is changing as a result of environment-related factors, including environmental regulation, developments in cleaner technologies, air pollution, improving energy efficiency, developments in gas markets and political activism,” Ben Caldecott, co-author of the report and Director of the Stranded Assets Programme said.

“This could lead to less demand from China and lower coal prices, which would increase the risk that Australian coalmines, reserves and coal-related infrastructure become stranded assets.

“These developments are not factored into the positions that most coal owners and operators are currently taking. Policy makers need to wake up to these risks as well,” he said.

“This report raises one simple question for investors, should any more capital be allocated to new coal projects?” Nathan Fabian, Chief Executive of the Investor Group on Climate Change (IGCC) Australia/New Zealand said.

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China now accounts for half the world’s coal consumption and its domestic coal market has grown to be three times the size of the international coal trade. As a result, China has fast become a major force in determining coal prices regionally and internationally.

The surge in coal demand has led to proposals for a large number of new coal projects and expansions around the world. Increasing demand from China is meant to provide the demand and price support to justify these projects, particularly in Australia.

But China’s demand for coal is changing, particularly due to environment-related factors. Planned projects and mine expansions in Australia considered feasible based on high coal prices will not go ahead if prices are low and stay that way.

In the study the researchers suggest that to minimise the risk of stranded assets, the companies involved should further interrogate the coal price assumptions underpinning the investment case for each of these projects. Investors should seek clarity on the opportunity costs associated with deploying finite capital into them too.

Australian state governments would also be adversely affected financially by projects being abandoned or mothballed - less production will reduce royalty payments. The Queensland government in particular, notionally has much to lose from the mega-mines in the Galilee not going ahead.

It would be sensible for policymakers to minimise exposure by diversifying their tax base. State and federal governments can also reduce the risk of their own investments becoming stranded assets by limiting the use of public funds and resources that support coal-related infrastructure, such as ports and railways.