GLOBAL COAL PRICES: Glut, Changing Fuel Usage Could Keep Prices Low

Global coal prices are currently trading at nearly 20-30% below their year-ago levels. The benchmark Newcastle thermal coal fell to a two-year low of $87 per tonne in June 2012, which traded at close to $142 per tonne at the beginning of 2011. Similarly, the Indonesian coal reference price too was trading around $96.65 in June ’12 from a peak of $127 in early 2011. Although prices have crashed with no bounce back in sight, a further downside appears limited.
“Major reasons for this decline include China’s economic slowdown and high coal inventory levels, increased production and exports from Indonesia and Australia, and increased exports by US coal producers due to cheap natural gas displacing coal used in US power generation,” according to a Fitch report.
For the power industry, coal is the most critical input. With domestic production falling short of demand, India has been increasingly importing coal, which is estimated to top 130 million tonne in FY13. The slide in the spot coal prices bodes well for power producers. “As a rule of thumb, for every $10 fall in the price of 5,000-kcal grade coal, an Indian power utility’s cost of production falls by . 0.27-0.28 per unit. However, the rupee depreciation is likely to erode this benefit,” said Debasish Mishra, senior director, energy & resources, Deloitte India.
While the global oversupply situation is not likely to improve in the near term, most experts reckon that coal prices may not fall much from here. James O’connell, senior managing editor, International Coal at Platts, says that coal prices appear to have a limited downside from here on. “Our understanding is that a further fall in coal prices would gradually make producers cut down production. In fact, in countries like Indonesia, small and medium-sized miners are already scaling back output. Coal prices are already near the marginal cost of production for a few of them,” he says. A Fitch Ratings report also echoes this. It forecasts that high-cost producers in Australia and the US would undertake production cuts if the current low price environment spills over into 2013. Such a move would limit production growth and help address oversupply, it argues. A recent industry overview report on Asia-Pacific coal by Citigroup also says that the coal price correction will prove cyclical. According to it, the only worry is about excess supply. “Prices could stay at the current low levels or move lower as long as the US is adjusting to cheap natural gas,” the report says. However, an upturn in prices could well be round the corner. The Citi report says that their understanding is that around 10-15% of Japanese contract thermal coal demand is on a July-June year-term and that industry sources suggest that fresh deals could be struck at around $105 per tonne, well above the spot prices and prove to be a positive surprise.