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Thermal coal prices to stay weak through 2015

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World Coal,

Weakness in thermal coal prices will extend into 2015, according to the latest Global Energy Weekly report from Bank of America Merrill Lynch. The bank has cut its average Newcastle price forecast for next year to US$65/t from US$ 3/t on the back of a growing physical surplus.

The [supply/demand] balance is on soft demand from China and continued strong mine ramp-ups around the world,” the bank said. “A new 6% import tax on Australian supplies into China may further depress Newcastle prices. Still, at US$65/t Newcastle prices are not low enough to force production cuts in Australia, as the vast majority of production earns enough to cover variable case costs as long as prices stay about US$55/t”.

The bank also warns that prices could fall further should global seaborne demand disappoint by more than two percentage points relative to its 2% growth forecast: “With very little room for further US export cuts […] prices could fall to US$55/t and stay there for a considerable time to force production cuts in Australia.”

“A potential negative demand shock could come from disappointing global economic growth or further protectionist policies from China,” the bank continued, “and add some downside risk to our average forecast.”

Beyond next year, however, and the bank sees a more balanced market with a small deficit that grows into a larger deficit in 2017. “The downside risk to seaborne thermal coal prices starts to dissipate in 2016 and we expect forward prices to rise at that point […] to average US$72/t and US$82/t in 2016 and 2017 respectively,” the bank concluded.

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