Slumping coal prices may be good news for environmental activists, but bad news for major Asia-Pacific exporters such as Australia and Indonesia. However, long term the outlook remains strong despite the U.S. shale boom and growth in renewable energy.
According to a Bloomberg survey, the price of coking or metallurgical coal used to make steel may fall to U.S.$200 a metric ton in the December quarter, with spot prices having fallen to two-year lows below this benchmark already. Current prices compare to the record U.S.$330 a ton in the June quarter 2011 following floods in the Australian state of Queensland that reduced supply.
Similarly, prices for steam or thermal coal mainly used in power generation have sunk to three-year lows of around U.S.$90 a ton. China overtook Japan as the world’s top importer of thermal coal in 2011 and according to some analysts, may seek to drive prices even lower.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
China is the world’s biggest coal producer, targeting production of 3.65 billion tons in 2012, but it has failed to keep up with rising demand for power despite its recent slowdown.
Currently the world’s biggest emitter of greenhouse gases, China continues to rely upon coal, a major source of emissions, for more than two-thirds of its power needs. The fossil fuel is also an essential input in steelmaking, with the world’s second-biggest economy producing 684 million tons of steel in 2011, but production is expected to fall in 2012 amid the slowest economic growth in three years.
Japan’s slow pick-up in demand has also failed to boost prices. Crude steel production in the first six months of 2012 was similar to the previous year at 54 million tons, despite reconstruction spending following the March 2011 disasters, although it is expected to increase demand for thermal coal due to nuclear plant closures.
Yet despite softer demand, strong production rates in Australia, Indonesia and the United States along with the emerging coal producer of Mongolia have lifted supply. Broker UBS expects top-grade thermal coal prices to drop from U.S.$105-110 per ton in 2012 to US$90 per ton in 2015/16, with coking coal prices also to decline.
As the world’s largest exporter of coking coal and second-largest exporter of thermal coal, Australia’s industry has suffered disproportionately from the slowdown, with low prices and high costs sparking a wave of layoffs.
Among recent retrenchments, Xstrata Coal has cut 600 jobs, Ensham 350 and BHP Billiton Mitsubishi Alliance (BMA) 300, with a number of coal projects either wound back or deferred.
Queensland’s coal industry has also been hit with increased royalties from a cash-strapped state government, prompting warnings by the Queensland Resources Council that more industry cost-cutting was likely.
Coal reporter Lou Caruana, editor of International Longwall News, told The Diplomat that additional cutbacks might be in the pipeline should prices fall further.
“Mining companies have been crunching the numbers on their operations, taking into account the lower coal prices and rising costs such as labor, transport and new government charges.
"Margins are being squeezed so mine management teams are taking a worst case scenario. If there were to be further softening of prices then you would expect further cutbacks in the future,” he said.
According to Caruana, the fall in prices was attributed to both slowing growth in the eurozone and China, along with the entry of the United States and Indonesia into the coal export market.
“U.S. coal producers have sought out export markets such as China and India because their domestic market has slowed down and it has been switching to gas for power generation. Indonesia has ramped up coal production and exports of thermal coal to supply the Chinese market over the last few years,” he said.
While demand in the region having lagged due to “sub-optimal” growth, new supply was still preparing to enter the market.
“For example, in Queensland there are major new projects slated for the Surat and Galilee basins, and in New South Wales [state] the Gunnedah basin. Added to this are the new coal mining developments in Mongolia,” he said.
While Chinese officials are now forecasting a recovery, Caruana said a rebound in prices would also require a significant pick up in the U.S. economy or the eurozone.
“Once the global economic outlook stabilizes, there will be growing demand for coal as a safe and affordable power source for newly emerging economies,” he said.
Despite environmental concerns, coal still accounts for 40 percent of global electricity needs and absolute consumption is expected to double over the next two decades due to demand from industrializing nations such as China and India.
“For all the talk about natural gas and renewables, coal unquestionably won the energy race in the first decade of the 21st century,” reported the International Energy Association (IEA).
Should such growth continue, reports of the death of “King Coal” appear to have been greatly exaggerated, at least for now.