Thermal coal price forecasts too pessimistic

From a pre-financial crisis peak of more than $190 a tonne, steam coal fell to $65 late by March 2009. The recovery was swift with prices more than doubling by January 2011 at more than $140.

But since then international thermal coal prices have been on a steady decline averaging $78.95 in May, which was actually a slight uptick on April.

A number of market observers sees the price falling to $60 a tonne by end of next year and little upside over the longer term.

That is as a result of a continuing trend of a significant decline in the share of fossil fuels in the global energy mix and far-reaching new rules in the US restricting coal-fired electricity plants.

Australian investment bank Macquarie said in a recent report via Platts predictions of $60–$65 a tonne for the global steam coal benchmark (FOB Newcastle 6,300 kcal/kg GAR) is overly pessimistic.

Analyst Stefan Ljubisavljevic believes a “further substantial deterioration” in the Chinese market is “unlikely in the short term” and at a mid-$60s price Australian producers will cut back on production:

“A miner’s decision on whether to produce is driven not by cash costs versus prices, but cash costs minus take-or-pay obligations versus prices,” Ljubisavljevic said. “We think this lowers the threshold for output cuts most probably into the mid-$60s/mt.”

Large coal producers in Australia could “cross-subsidize mines” and change their export mix says Macquarie, which means it is likely that smaller-scale coal miners in Indonesia “would drop out of the market first”.

Even at these historically depressed price levels massive investment in coal mining is still needed.

To meet the world’s energy demands through 2035, the International Energy Agency predicts the cumulative investment in coal amounts to $735 billion, with a further $300 billion needed in transportation infrastructure.

Investment in coal supply is much less expensive per equivalent unit of output than oil or gas and power-hungry China will be responsible for 40% of the world’s investment in coal mining over the next couple of decades.

Frik Els | June 11, 2014

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