The nine reasons coal towns will continue to struggle: Australian Ethical Investment

Property investors who stake their income on the performance of mining towns need to be aware of a variety of factors that might impact their properties, from new mines to the international resource markets.

Those investing in coal mining towns will no doubt be interested to know that the price of thermal coal has dropped 51% since July 2011, according to Australian Ethical Investment - and the company's international equities trust portfolio manager Nathan Lim thinks the trend is likely to continue.

According to Lim, the reasons coal is struggling are largely "secular", not cyclical.

There are nine factors Lim thinks are driving the resource's slowdown:

1. "Global production isn't coming off-line fast enough"
   
   Lim claims that in Australia, around "40% of all seaborne coal is unprofitable". In order to fulfill prior shipping commitments, producers are forced to sell the resource at a loss. However, Lim believes the problem will self-correct, once demand picks up or producers run out of money.
   
   
2. Japan's consumption is up... but it won't continue
   
   With many of its nuclear power plants out of action, Japan has increased its consumption of coal, pushing up prices, Lim explains. But the push is only temporary, with nuclear power plants to restart and an increase in the use of solar energy.
   
   
3.  "Electricity consumption in the developed world has either stopped growing or is in outright decline"
   
   According to Lim, the weakened position of the global economy has cut power consumption, but he also believes increased energy efficiency and "behavioural changes" are behind the decrease in demand.
   
   
4. "Domestic coal is not so welcome at home anymore"
   
   Lim believes that the United States' increase in coal exports over the past decade is the result of more stringent legislative requirements for power plants, which lead some owners to close their facilities. He predicts another set of closures after new US Environmental Protection Agency (EPA)rules on mercury come into play in March 2015, degrading demand further.
   
   "This coal is finding its way into the international coal markets further expanding the gap between supply and demand," explains Lim.
   
   
5. New carbon emission legislation for existing power stations
   
   The switch to natural gas from coal is a big feature in new EPA legislation targeting carbon emissions from power stations. Given the low price of natural gas, Lim predicts the legislation will lead to more coal-fired power plant closures, and effectively restrict new coal fired plants from being constructed. He believes even more coal will enter the international markets as a result.
    
6. EU greenhouse gas emission targets
   
   "For its next decadal goal, the EU has targeted a 40% reduction in greenhouse gas emissions from 1990 levels by 2030," explains Lim.
   
   "Amongst the highest emitting fossil fuels, coal will continue to be friendless in Europe."
   
   
7. "A more punitive price on carbon will make the EU’s goal more easily achievable"
   
   Lim predicts that although carbon prices have been "distorted by unintended policy decisions", eventually policy makers will find the "right" structure.
   
   "When this happens, we expect the cost of coal pollution will dramatically increase the cost of coal-fired electricity and allow other, low emission technologies to better compete," Lim claims.
   
   
8. India's new Prime Minister appears to favour renewable energy
   
   According to Lim, India's new Prime Minister Narendra Modi is "very much pro-solar", with a history of supporting renewable energy.
   
   "Calling for solar power to bring electricity to 400 million people is ambitious without equal," notes Lim. "This goal tacitly recognises that India has failed to bring its people out of energy poverty using conventional methods."
   
   
9. China plans to ban coal-fired power from Beijing by 2020
   
   Though some claim that the move is a token one given China's total coal consumption, Lim suggests that China is continuing its practice of "experimentation" before it comes to a decision.
   
   "It is more instructive that China is taking such extraordinary steps to deal with air pollution that high emitters should heed the warnings coming from the government," states Lim.
   
   "Ordinary Chinese citizens are fed up with the pollution and coal is an obvious target for their frustrations. Given that China is also experimenting with carbon pricing, are the world’s biggest producers of solar power (and a close second or third in wind) and have made pollution abatement a priority, we might be seeing the beginnings of a major structural shift in China’s generation mix."