MELBOURNE – Coal may be a dirty word in some circles but at the end of 2011, it was still king of the global energy castle.

That will change in coming decades as natural gas-fired power in particular, nuclear fuel and renewables are increasingly used.

However, for the time being, and despite its high carbon dioxide-emitting ways, coal is the cheapest and the huge demand for it in emerging economies makes it a vital commodity for Australia.

Politicians speak about becoming cleaner and greener but have been unable to resist the quick, cheap option that thermal coal offers to power their economies.

Australia’s second-biggest export earner – worth about $43 billion in 2010 – remains the world’s largest and fastest-growing energy source. Iron ore is Australia’s biggest export earner.

It was a near record year for merger and acquisition activity in a shrinking Australian coal sector with the takeover value heading towards $27 billion.

Chinese state-owned giant Yanzhou Coal Mining and Gloucester Coal agreed to a merger that would create an $8 billion producer.

Hunter Valley company Whitehaven Coal recently announced it would buy billionaire Nathan Tinkler’s Aston Resources to form a $5.1 billion company.

“What you are seeing at the moment is evidence that the customers are really concerned about security of supply and making sure they position themselves for that,” financial services firm UBS resources research head Glynn Lawcock said.

“If you look at the power stations built out across Asia for all the different countries, including India, South-East Asia and China, coal still forms 65 to 70 per cent of the base-load power generation.”

He predicts that in 2012, coal producers will invest heavily to grow as new and existing ports are built and expanded on the east coast.

The risks are that Europe’s economic problems will slow China’s growth and that the emergence of natural gas as a cleaner alternative will reduce coal’s demand.

However, ASX-listed China-based coal trader Sinox said, even allowing for a slowdown, China’s economic growth would remain above seven per cent and coal was still needed for domestic use.

“If all the infrastructure is built, based on coal, you are not going to dismantle that overnight,” chairman Spencer Chan said. “There’s nothing scary about coal for investors.”

The energy currently most likely to dethrone coal is natural gas, which is cleaner than coal and cheaper than renewables.

Coal-fired power is still cheaper, but gas is coming down in cost and can be switched on quickly to meet peak demand loads and become a baseload supply.

The International Energy Agency has spoken of a looming “golden age of gas” with massive rises in use and demand set to more than double by 2020.

The Australian government’s recent draft Energy White Paper predicted that gas would power 44 per cent of electricity generation by 2050, up from 15 per cent today.

Gas has more diverse uses than thermal coal, being used in industrial manufacturing and heating as well as electricity generation.

That’s great news for Australia’s economy because of its massive gas reserves; it is now the world’s second biggest exporter after Qatar.

Conservation groups oppose it because it still emits carbon and potentially threatens the environment, through unconventional extraction methods such as coal seam and shale gas.

A $200 billion suite of liquefied natural gas projects is approved and under way in Australia – including about $50 billion in three giant coal seam gas projects around Gladstone – involving major global and Australian oil and gas companies.

BHP Billiton spent almost $US20 billion ($19.9 billion) this year on two acquisitions in the booming US shale gas market.

UBS analyst Gordon Ramsay said Australia was lucky to be best positioned in Asia to supply LNG. He said the Chinese had supported Australia’s LNG projects, with Sinopec this month increasing its stake in the Australia Pacific LNG project to 25 per cent and agreeing to a 3.3 million tonne a year deal.

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