TORONTO (miningweekly.com) – US coal mines are most at risk as Australian and Indonesian coal suppliers see some upside in the difficult months ahead as they continue to capture market share of coal exports from higher-cost producers, commercial intelligence firm Wood Mackenzie said on Monday.
In its 2015 coal outlook report, Wood Mackenzie noted that, further to modest productivity gains, the rapid fall in oil prices and currency devaluation in Australia and Russia would help to lower costs.
Therefore, Australian mines stood in a relatively strong position compared with higher-cost suppliers – particularly those in the US – that were at much greater risk of closures this year, the analyst advised.
Even with increased closures and reduced US supply, Wood Mackenzie did not foresee enough volume exiting to balance the market and support price recovery. Lower-than-expected demand, especially from China, combined with persistent output would be critical to sustaining the weak market environment.
“Australia is a standout competitor in both the metallurgical and thermal coal trade, but particularly the former. Comparing 2014 with 2013, while global metallurgical coal import demand reduced by about eight-million tonnes, Australian exports rose by around 14-million tonnes, growing seaborne market share from 58% to 64%.
“The scalability of Australian mines and their high coal quality has enabled the displacement of major competitors in US, Canada and Indonesia. This trend is likely to continue thanks to a continued strong operating performance plus currency depreciation. On the other hand, US suppliers, many of which exhibit high costs, will not see the cost relief that currency devaluation brings to Australia,” principal Asia Pacific coal analyst Rory Simington added.
Further, increased competition would come from higher Mozambique exports this year as Vale’s Nacala transport corridor ramped up, indicating another year of aggressive pricing as producers fought to secure sales. In thermal coal, Australian exports were also strong, leaping 20-million tonnes despite seaborne demand remaining essentially flat last year.
Despite a traumatic 2014 for the coal industry, mine shutdowns were relatively muted.
Simington explained that, in fact, metallurgical supply reductions were more than offset by the reduction in Chinese import demand, resulting in increased overcapacity.
“Although overall closures will accelerate this year, they will unlikely redress the imbalance,” he said.
Wood Mackenzie also noted that costly take-or-pay obligations in the event of closure, made it more expensive for mines to shut down than operate at a loss. As such, they remained in production and hampered the return to tighter market conditions.
The recent low oil price and exchange rate had driven cost relief for Australia, Indonesia and Russia, which would further reduce the likelihood of wholesale supply cuts, as well as delay any price recovery.
China’s economic rebalancing would continue to affect power demand growth and, therefore, thermal coal requirements, Wood Mackenzie noted.
Of critical importance to the seaborne trade would be the effect of government policies designed to protect the environment as well as domestic coal suppliers.
“Current industry focus is on the new trace element restrictions for imported coal. We see most seaborne supply meeting the new guidelines but import levels are affected owing to the uncertainty of the accuracy of coal quality tests and delays it may cause to the delivery process.
“Another big uncertainty to watch [out for] is the lengths to which the Chinese government will go to protect its domestic industry,” Wood Mackenzie research director for global metallurgical coal Robin Griffin stated.
The firm noted that stricter limits on imported coal quality were possible and that the government could make an aggressive move to waive the 17% value added tax (VAT) charged on coal sales which could considerably enhance the competitiveness of Chinese coal and enable some of the best-quality and lowest-cost Chinese coking coal to compete in Japan, South Korea or Taiwan.
Should this occur, worsened oversupply conditions could be realised this year.
“As China makes up 22% of seaborne trade and is expected to see continued domestic oversupply, the country will be a major cause of depressed global import demand this year. Market fundamentals outside of China also remain uninspiring, for both metallurgical and thermal coal. Under such circumstances a material price recovery is unlikely this year,” Griffin added.
MERGERS & ACQUISITIONS
Wood Mackenzie pointed out that mine asset valuations had fallen considerably over the last three years as a result of the weakening market.
“While low prices endure, more companies will look to shed assets, perhaps to decrease debt or to allow a greater focus on their highest-value operations. The negative price environment will persist through 2015 but not forever.
“Given our expectation of long-term strength in coal demand fundamentals, the present market conditions offer a window of opportunity for both suppliers and buyers to consolidate their positions in the industry. We expect mergers and acquisitions to start picking up this year, particularly for companies that want to gain a foothold in the industry for the long term,” Griffin commented.