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Coal prices to drop further – BofA Merrill Lynch

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Coal prices are to drop further and stay low through 2016, according to the latest commodities research from Bank of American (BofA) Merrill Lynch. The bank is now forecasting average Newcastle thermal coal prices of US$57/t for 2015, down from US$65/t, and US$52/t in 2016, from US$72/t.

On the supply side, lower oil prices and weak local currencies has pushed US dollar production costs down, lowering the price floor still further. This has been seen most extremely in Russia, where the collapse of the ruble has seen prices of API2 coal in rubles jump 50% since mid-2014. In Australia, Newcastle prices in Australian dollar terms are almost flat, although they are down almost 8% in US dollar terms.

Ruble depreciation has pushed Russia from first to third on the cost curve; Australia now occupies the top spot. “Given the downward shift in the global cost curve, only 20% of seaborne producers are now not covering cash costs at current prices, compared to 40% in 2014,” noted BofA Merrill Lynch.

Turning to demand, China’s demand has been a key source of weakness and BofA Merrill Lynch now expects outright declines in Chinese thermal coal seaborne imports over the next few years. Lower levels of electricity demand due to lower GDP growth and efficiency gains will see the country’s power demand grow by just 5%/yr in the short term – demand growth that can be met by the forecast growth in alternative energy sources.

“In 2015 and 2016, the load capacity from clean generation sources is growing by 55 GW, comprising a mix of nuclear, hydro and wind. This clean generation is in theory sufficient to meet incremental power demand of 50 – 60 GW over the same period,” said the bank. “Meanwhile, China is adding 20 GW of effective coal plant capacity each year to 2018, which could replace older, less efficient plants, thus reducing the overall coal burn.”

Chinese demand for seaborne imports is also being hit by higher domestic supply and efforts by the government to support domestic coal producers at the expense of imports. ”We see the decline in Chinese imports continuing to the tune of 15 million t this year under existing policies,” said BofA Merrill Lynch.

India remains the bright spot for import demand – but it “cannot carry the world”, as the bank evocatively put it. “Overall the global outlook for thermal coal demand is rather bleak in 2015 and 2016,” the bank concluded.

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