China’s Appetite for Australian Coal Up 51% in 2006

China's appetite for Australian coal is in the news again. Let's put China's coal needs in perspective, or at least in numbers. China bought $491 million worth of Aussie coal last year, a 51 per cent increase from the year before. It also bought $3.8 billion worth of iron ore. That was a 100% increase from the year before.

"According to forecasts by the Australian Bureau of Agricultural and Resource Economics, from to 2001 to 2050 China will more than quadruple the amount of power it produces from coal-fired stations-surpassing the United States as the world's biggest generator of coal-based energy," reports today's Australian Financial Review.

This is bad news for the air, inasmuch as Chinese coal-fired plants are not "clean." China has been happy to trade growth for dirty air, using the advantage of lower energy costs for its factories to keep its manufactured goods cheap on global markets. It has also managed to rack up large export surpluses, nearly keeping up with oil exporters, as this chart shows.

There's nothing new here in terms of the economic growth model. It's a trade that Britain, America, and Australia were also happy to make to build domestic industry. Eventually, workers get wealthier and become voters. Wealthier voters decide that rising standards of living are no good if you don't have a long, clean-breathing life to enjoy them. And in any event, energy tended to get cheaper as it got more efficient in Japan, Britain, America, and Australia.

Today, though, there is political pressure to include the cost of pollution in economic growth models. Perhaps its high time this happened. Or perhaps the cost is only now so high that its become a factor. Or perhaps its all a public spectacle in the making. One thins is for sure: the air is not getting cleaner.

Truthfully, there is no such thing as "clean coal," anymore than there is "clean cigarette smoke" for your lungs, even though we hear politicians and industry talk about it. In the first case, most of the chemical processes which treat coal before it is combusted to produce electricity help eliminate harmful sulfur and nitrous oxides and other particulate emissions. This is no small thing. And it does burnish coals image a bit.

But these days, the key by-product of coal as a source of energy comes AFTER it is combusted, in the form of carbon dioxide. That is much harder to "clean" up. It is, possible, however to sweep it under the rug like so many kitchen dust bunnies. Out of sight may be out of mind, but it doesn't mean out of existence.

Coal industry advocates promote carbon sequestration or carbon capture and storage (CCS) as solutions the... uh... problem of carbon dioxide missions. They have even added acronyms to make it sound more sophisticated. But it comes down to capturing CO2 gas and then storing it somewhere, the way you might hide grandma's year old Christmas pudding in the back of the breadbasket. It doesn't really go away, but at least you don't have to think about it all the time.

In unavoidable economic terms, capturing carbon dioxide and storing it costs money and takes additional energy. Those aren't reasons it shouldn't be done. But it's worth pointing out to an eager public that carbon capture means higher energy costs. The higher costs do begin to make nuclear- generated power cost competitive. But that itself has a whole set of associated costs and emotional hot-button issues.

It's obvious that carbon emissions and uranium mining will be key issues in the upcoming Federal election. Federal Environment Minister Ian Campbell laid the groundwork for a summer's worth of assaults on state labour governments by saying, "If all of Western Australia's uranium reserves were used to generate electricity instead of using current-technology coal-fired power stations, that would mean greenhouse gas emissions savings of between 5,000 and 6,000 million tonnes... WA has an opportunity to be a great contributor to the global climate change challenge but sadly it is hell-bent on maintaining its farcical policy of locking up uranium reserves."

We have some sympathy for WA on this one. It's not like the state doesn't have plenty going for it without a uranium boom to deal with. Development of new mines and a new domestic nuclear power industry requires additional infrastructure spending and labour. Both are already in scarce supply in Queensland and WA. Why invest in uranium? Where's the incentive?

It comes down to carbon dioxide emissions. Nuclear is one way to reduce them. Otherwise, you're left with the dubious science of carbon capture and sequestration. And there's the legitimate question of whether carbon capture is really a long-term effective solution at all. If you hide your garbage in the garage, does it really go away?

Carbon dioxide emissions are not like lovable stray dogs. You can't round them up in a pound and euthanize them when no one is looking. You can't hide them in the basement, or stuff them under your mattress, or like a few extra pounds, buy an elastic waist band to accommodate them.

You can, however, inject them into depleted geologic structures that used to house oil and gas. And you can even use captured carbon dioxide to enhance the oil and gas recovery in fields previously thought played out. But the gas doesn't go away if you inject it into the ground. It only goes away through natural processes involving the world's oceans. So burying the carbon dioxide is effectively the same as burying nuclear waste-the implicit threat the by- product of a particular kind of energy production isn't eliminated, it's merely displaced.

Ah. If it were just easier to substitute one kind of energy for another. But perhaps we won't have to worry about any of this. With oil prices falling dramatically, the incentives to substitute other kind of energy fade away, at least from an economic perspective. Personally, it is our impression that now is probably the perfect time to take a look at alternative energy investments. Why?

First, we are pretty sure that the oil price cycle will turn up again. Oil has a short history. But it appears to be getting more volatile as it gets more scarce. Lower prices make substitution technologies less economic today. But do you really believe the oil price will be trading at US$30 five years from now?

Second, the first wave of investment in alternative energy was filled with imposters eager to cash in on the interest of the hot money. Now that the hot money has moved on, what's left are viable commercial technologies and the management teams that understand how to develop them. The interest may have dried up, and so too the capital. But this is precisely the time where you, the individual investor, have an advantage over the rest of the world.

That's because the rest of the world is buying tech stocks and blue chips, not sifting through the alternative energy market for real tangible value and growth potential. Granted, it's like going into the least crowded restaurant in town. You won't be seen, and your vanity will remain unflattered. But it's not being admired that matters in investment markets, it's total return, and that tends to come by buying assets no one else wants exactly when they are most unpopular and thus, cheap.

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