The coal sector won’t say it out loud, but you can hear it whispered in their internal meetings, and in between the lines of their annual shareholder reports; thermal coal is now a toxic asset.

It’s not something you would have dreamed of in the past few years, as the coal price shot up to record highs and share prices followed, while state budgets apparently balanced on the backs of boosted royalty payments.

But even then an ominous flag should have appeared above the horizon; thermal coal production was not ramping up to meet insatiable demand. In fact, it was barely keeping up.

By September 2022, the coal price was well beyond $US400 a tonne, up from only $55 a tonne a few years before. However, thermal coal exports were actually down by 11 per cent compared to the same time four years prior.

Sure, there were some pretty big floods that year, and production across the sector suffered, but costs were up as well, and they’re staying there.

Going forward, the Department of Resources estimates that coal prices will fall in the next few years. For thermal coal, it predicts prices falling by 12.5 per cent in the next two years, and expects the total export value of Australia’s thermal coal exports to decline by a quarter.

This decline is largely because the energy transition is placing incredible downward pressure on forward thermal coal demand. In fact, forward estimates indicate that global thermal coal exports may have peaked, and are entering what the IEA calls structural demand decline.

In the past year, Australia’s thermal coal exports “to almost all major trading partners fell”, with the exception of China. However, China’s increased demand is seen as a short-term blip, as Chinese “thermal coal imports are expected to decline as the incredible rollout of renewables progresses”.

While the department doesn’t project a major impact on Australia’s total export quantities in the next two years, it does see big changes on the horizon. This is especially true of some of our major buyers in East Asia, as they gradually increase renewable energy share and ramp up nuclear power. Add to this the planned rollout of ammonia co-firing in Japan, Korea and China, and Australia’s thermal coal future looks slightly unsettling.

Investors have been asking questions about the sustainability of thermal coal for years, not just in terms of its climate impacts. In response, mining companies seem to be collectively shifting their portfolio from thermal to metallurgical coal as quickly as possible.

Already this year, we’ve seen significant changes in the industry, but almost all of the spending has been towards metallurgical coal. At the same time, some large thermal coal mines like Mount Arthur (in Muswellbrook, northern NSW), just couldn’t find a buyer interested.

Only China is buying more of our thermal coal – and that’s not expected to last. Photo: TND

Alarm bells across the industry

Last week, Peabody energy paid up to $5.8 billion dollars to acquire Anglo American’s metallurgical mines in Queensland. This positions the company as one of the biggest players in Australia’s metallurgical coal sector, and formalises Anglo American’s exit from coal altogether.

Prior to Peabody’s acquisitions, Whitehaven coal spent close to $5 billion to purchase two other metallurgical coal mines in Queensland. This came after years of concerns from investors that the company was far too invested in thermal coal, and promises from executives to “reposition the company” towards the metallurgical market.

Similar to Anglo American, diversified miner South32 also exited from coal earlier this year. It sold its ownership stakes in Illawarra Metallurgical Coal mines for more than $2.5 billion. These are some of the only metallurgical coal mines in NSW, where the vast majority of coal mining is still thermal coal.

The sale was made to a consortium of subsidiaries of GEAR and M Resources. GEAR is owned by the heir to one of the richest families and conglomerates in Indonesia, while M Resources is owned and managed by Matt Lattimore, self-described “emerging coal baron”. The two entities are intertwined through jointly owned companies, including Stanmore resources, which also owns three largely metallurgical coal mines across Queensland.

All of these acquisitions and almost all of the action this year has been in metallurgical coal, where there remain doubts about how quickly steel producers can shift to scrap and hydrogen-based alternatives.

While this may bring confidence that mining is here to stay across small towns in Central and North Queensland, it should ring alarm bells for the NSW government, where most of Australia’s thermal coal production is, and where three thermal coal mine extensions were approved already this year.

From 2026, China has promised to decrease coal consumption, and may decrease thermal imports by over 100 million tonnes a year by then. Indonesia recently announced structural shifts in its energy sector and India’s increasing coal production could largely compensate for potential demand increase. For many, the hope is Vietnam, but the rapidly growing economy has diversified its coal supply chain towards lower-cost sources, such as Indonesia and Russia.

This leaves an important question about the long-term sustainability of Australia’s thermal coal, and the stranded asset risk that only increases with every coal mine extension.

There are applications to extend the life of more than 15 additional thermal coal mines in NSW alone. While the owners of these mines may be extremely confident in their applications, the market and investors are increasingly doubtful of the future for thermal coal exports into the 2030s.

I guess the critical question is, will the government listen to the market? And if it does, what should it do to ensure coal mining regions against stranded asset risk?

Christopher Wright is the climate strategy adviser at energy think tank Ember, with a focus on coal mining