RIP King Coal?
Image Credit: Flickr - Creative Commons License (Jen SFO-BCN)

RIP King Coal?


‘King Coal’ may not have been dethroned, but the industry’s recent challenges has left the region’s producers badly bruised.

A slump in prices has seen a spate of mine closures, job cuts and earnings downgrades across the Asia-Pacific as coal miners have belatedly come to grips with the end of the boom.

Falling Chinese demand, the impact of the U.S. shale boom and rising production have seen prices halve from their peak levels.

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Xstrata’s agreement with Japan’s Tohoku Electric to sell its thermal coal at US$95 a ton is down nearly a third from the fiscal 2011 price. Coal accounts for nearly a quarter of the fuel currently used by Japan to generate power, and the new benchmark is expected to flow on across the Japanese industry and Asia.

China is the world’s biggest coal producer and its industry has suffered proportionately from lower prices, with profits diving by 50 percent in March, according to the latest National Bureau of Statistics data.

In leading exporter Indonesia, production has increased but profits have dived, with Adaro Energy announcing a 66 percent profit fall in the first quarter of 2013 and Kideco posting a 38 percent drop. The fall in the price of coal and other commodities has hit economic growth, with the government under pressure over planned fuel price increases.

Weak coal sales have also hit emerging producer Mongolia, with the World Bank forecasts will see slower growth and a higher budget deficit due to reduced exports.

Meanwhile, despite power shortages in India, investors are reportedly reluctant to commit funds due to uncertainties over supplies, while Indian Prime Minister Manmohan Singh has faced calls for his resignation over industry irregularities.

In second-largest exporter Australia, Xstrata’s agreement to sell its thermal coal to Japan at the cheapest price since 2009 has sparked speculation of more industry cutbacks. Australian spot prices dropped last week to $85 a ton, the lowest level since November.

According to analysts, more than 5 million tons of Australian thermal coal production is not viable at the Japanese price. The Australian Coal Association estimates more than 9,000 jobs have been shed over the past year, while a number of projects have been axed, including BHP Billion Mitsubishi Alliance’s Gregory and Norwich Park mines.

“A lot of companies became focused during the boom on production at all costs,” industry adviser David Arnott of Golder Associates said in an interview with The Diplomat. “Those sort of costs you can deal with when the commodity is at a high price, but once the edge comes off, such costs become unsustainable.”

Analysts say the newly merged Glencore Xstrata Plc has “set the tone for the new ‘age of austerity’ for miners,” announcing plans for “restructuring and refocusing” after completing its $29 billion takeover of Xstrata. Greenfields projects are expected to be off the agenda for the newly formed company, with Xstrata having already shed 600 jobs in Australia.

Brighter times forecast

Despite the gloom, better times may lie ahead, industry sources say.

Indo Tambangraya Megah (ITM), the Indonesian coal mining unit of Thailand’s Banpu, told the Jakarta Globe that the industry had hit bottom and was poised to rebound.

“We are bullish toward the industry,” Hartono Widjaja, ITM sales and marketing director, told the Indonesian newspaper on Wednesday.

“What happened last year was merely cyclical. The impact felt greater as the industry had experienced a good time for too many years.”

According to Widjaja, the international seaborne trade in coal increased 80 million tons in 2012 to an all-time high, with the recent excess supply a response to the surge in demand.

Evidence of the upcoming recovery has emerged in the United States, with leading producer Peabody Energy forecasting a stronger outlook for 2013.

While U.S. demand has been hit by rising gas production, the company said Monday it expected domestic coal demand to expand next year by “60 to 80 million tons” over 2012 levels.

“Our outlook for 2013 is positive. Chinese and Indian coal imports are rising, Chinese steel production is growing, and new coal generation is being developed around the globe,” chief executive Greg Boyce said.

While few are expecting boom conditions to re-emerge anytime soon, the green shoots may indicate that better times lie ahead for the former “black gold.”

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