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Australian coal producers well positioned in oversupplied market

World Coal,

In a 2015 global coal outlook report, Wood Mackenzie says that Australia and Indonesian coal suppliers will see some upside in the difficult months ahead, as they continue to capture market share of coal exports from higher cost producers. Further modest productivity gains, the rapid fall in oil prices and currency devaluation in Australia and Russia will help lower costs. Therefore, Australian mines stands in a relatively strong position compared with higher cost suppliers – particularly those in the US – which are at much greater risk of closures this year. Even with increased closures and reduced US supply, Wood Mackenzie (WoodMac) says they do not foresee sufficient volume exiting to balance the market and support price recovery. Lower-than-anticipated demand, especially from China combined with persistent production will be key factors that will sustain the weak market environment.

Australian producers best positioned in 2015

Rory Simington, Principal Asia Pacific Coal Analyst for WoodMac, says, “Australia is a standout competitor in both the metallurgical (met) and thermal coal trade, but particularly the former. Comparing 2014 from 2013, while global met coal import demand reduced by about 8 million t, Australian exports rose by around 14 million t, 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.”

Furthermore, increased competition will come from higher Mozambique exports this year, as Vale’s Nacala transport corridor ramps up. This points to another year of aggressive pricing, as producers fight to secure sales. In thermal coal, Australian exports were also strong, leaping 20 million t despite seaborne demand remaining essentially flat last year.

Lower costs discourage large-scale shutdowns

Despite a traumatic 2014 for the coal industry, mine shutdowns were relatively muted. Simington explains, ”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.” Costly take or pay obligations in the event of closure, makes it more expensive for mines to shutdown than operate at a loss. As such, they remain in production and hamper the return to tighter market conditions. The recent low oil price and exchange rate has driven cost relief for Australia, Indonesia and Russia, which will further reduce the likelihood of wholesale supply cuts as well as delay any price recovery.

China uncertainties depress demand in oversupplied market

China’s economic rebalancing will continue to affect power demand growth and therefore thermal coal requirements. Of critical importance to the seaborne trade will be the effects of Government policies designed to protect the environment as well as domestic coal suppliers. Robin Griffin, Research Director for Global Metallurgical Coal, says, “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 due to the uncertainty of the accuracy of coal quality tests and delays it may cause to the delivery process. Another big uncertainty to watch is the lengths to which the Chinese Government will go to protect its domestic industry.” WoodMac says stricter limits on imported coal quality is possible and 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 metallurgical coal to compete into Japan, South Korea or Taiwan. Should this occur, worsened oversupply conditions could occur in 2015.

Griffin says “As China makes up 22% of seaborne trade and is expected 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”.

M&A activities to pick up in 2015

“Mine asset valuations have fallen considerably over the last three years due to the weakening market. Whilst 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 M&A to start picking up this year particularly for companies who want to gain a foothold in the industry for the long term.”

Adapted from press release by Sam Dodson

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