With coal fast becoming a pariah industry for many of the largest banks and asset managers, mining companies around the world are facing up to a future cut off from many of the traditional capital providers that have historically funded their operations.
BlackRock is the latest to pull out, instructing all its active fund managers to sell out of any coal-heavy investments by the middle of the year. It joins Axa, BNP Paribas, Standard Chartered and UniCredit, which have all announced phased pullbacks from the industry in recent weeks.
The freezing of capital flows comes at an already difficult time for thermal coal, the burning of which creates 15bn tonnes of carbon dioxide a year - 40% of all CO2 emissions. Falling demand in Europe and the US has led to a collapse in coal prices, putting many producers under acute financial stress.
In the US, that has led to a rush of bankruptcies, with eight coal producers filing for protection from creditors in the last year. Against that tough backdrop, raising capital has been difficult. The largest US coal miner, Peabody Energy, pulled an US$800m bond in September due to lack of demand.
With demand for coal in Europe and the US set to continue falling as electricity producers – the main buyers of coal – convert their plants to gas and commission more renewable energy, and with more and more financial firms unwilling to fund coal extraction, the squeeze is expected to worsen.
"What you've seen in the space is a decline in access to capital," said Ben Nelson, who covers the US coal industry for Moody's. "Over the past few quarters, loans have traded off, bonds have traded off – essentially, there are clear signs of stress.
"It's almost inevitable that coal companies will start to express more financial conservatism. And the driving factor for that is not only what's happening with coal volumes and coal prices, but also access to capital. We think that that is an emerging credit issue for the coal industry."
But while weaker miners have been shut out of the market, stronger coal companies still have good access to capital - even in the US and Europe, where financial and social pressures are most acute. Coal producers sold US$45bn of bonds and US$12bn of syndicated loans last year, about half of which was originated in the US.
And, while Peabody was unable to get its bond deal away at a price it was willing to pay, many of the largest banks were still willing to extend US$600m of credit to the coal producer. Bank of America, BMO, Credit Suisse, Deutsche Bank, Goldman Sachs and JP Morgan all participated in the facility.
But outside of the US and Europe, where less than 15% of the world's coal is mined, it's a different story. In China, by far the biggest producer, importer and burner of coal, mining companies such as Shenhua Energy, China Coal Energy and Shaanxi Coal enjoy strong access to finance, mainly from local banks.
"There is still considerable financial support from state banks and development banks, which are pursuing such projects – particularly if they are of national interest," said Monsur Hussain, a bank analyst at Fitch who has tracked bank lending to carbon-heavy industries.
Coal is strategically important to China, which is opening new coal power stations at a faster rate than they are being closed in other parts of the world. In a bid to secure supply, Chinese banks have stepped in to provide finance where Western banks have pulled out – in Indonesia, for instance.
As a result, while the pullback of some of the largest banks and asset managers from thermal coal might cause some localised pain, the impact of such moves on the global coal industry – more than half of which is located in China and India – is likely to be more limited, as both countries' state banks prove willing to write cheques.
There is also scope for other sources of capital to step in. Private debt and private equity, which so far have made few commitments on investing in coal production, could step in to replace public markets and bank lending.
"Coal companies could need to look more creatively at other sources of capital," said Moody's Nelson. "It starts to call into question whether the standalone public company format is the right place for coal. How they fund themselves is starting to change and that trend could accelerate in 2020."
MONEY TO BE MADE
While a sudden government-led clampdown could upend calculations, for now there is still money to be made in the right coal mines. Demand from China is set to grow for the next five years and from India for the next decade, according to Morgan Stanley. At the same time, supply is constrained.
"Coal can't just disappear out of the energy mix," said Peter Archbold, global head of natural resources at Fitch, adding that – while the outlook is uncertain – demand from Asia is expected to remain strong. "Many of these assets might continue to produce for 10 years or even longer."
At the same time, more constrained access to capital in some parts of the world – especially for new mines – could lead to a rise in underlying coal prices, pushing up profitability elsewhere. Glencore boss Ivan Glasenberg has said he expects coal returns to increase in coming years.
"From a supply perspective the restrictions on project funding are having an impact," said Archbold. "Because coal is unlikely to disappear from the energy mix over the next decade, in isolation this means coal prices are likely to be higher than they otherwise would be."
The wildcard is China. While it generates more than half of its energy from the black stuff, the country's next five-year plan from 2021 is expected to address climate change. If demand from the biggest coal burner suddenly drops, that could change everything.
"The question to ask is whether there are still actually going to be profitable business models in those sectors," said Jim Totty, a managing partner at Earth Capital, a private equity firm focused on sustainability. "If profitability in the coal sector collapses nobody will finance them."