Global coal prices have yet to find a bottom, according to a recent research note from Bank of America Merrill Lynch, with the bank reducing its average Newcastle price forecast to US$47 per tonne in 2016 and US$45 per tonne in 2017.
“Despite hovering around multi-year lows, we believe the end it not nigh,” the bank said, citing pressures on demand, including cheap LNG supplies and policies that favour cleaner energy forms, coupled with plentiful supply.
Too much coal…
Key to the supply-side excess is domestic production in China and India, which has effectively displaced imports. In the former, BofA Merrill Lynch points to three factors that have negatively impacted import demand: tightening regulations on the quality of imports, a fall in demand for coal from consumer industries, including cement and power, and a falling price for domestic coal on the back of serious over-production.
“All in, thermal coal imports have compressed by an astounding 39% y/y in the first nine months of 2015 and are on course to continue to decline next year,” notes the bank.
Meanwhile in India, Coal India has reversed a trend of underperformance and recorded strong production growth as the government targets self-sufficiency in thermal coal by 2018. This new domestic supply has already seen Indonesian exports displaced, hitting the price of Indonesian coal and forcing production cutbacks in the world’s largest thermal coal exporter.
“In fact, 30% of miners in [Indonesia] are not covering their cash costs, with many small miners going out of business” said BofA Merrill Lynch. “Although Indonesian production has continued to decline, we need a larger structural adjustment with further output cuts, in our view.”
The supply picture is completed by Australia, where coal production has held up as low oil prices and a weak Australian dollar has helped to support miners. With BofA Merrill Lynch forecasting an Australian dollar rate of 0.65 against the US dollar by the end of 2016, miners will be further protected from falls in the US$ cost of coal – helping to keep production up.
… not enough demand
Although there are some positive signs for coal demand in Asia, as long as domestic supplies remain high in India and China, demand for seaborne demand will remain weak and prices will continue to soften. Meanwhile in the Atlantic Basin, coal appears to have entered a much bigger structural decline as low-cost natural gas and significant policy support for renewables pushes coal demand down.
Highlighting the example of the UK, BofA Merrill Lynch note that coal imports have collapsed in 2015 after a hike in the UK’s carbon tax, the Carbon Price Floor, while coal-to-gas switching in the power sector seems likely to increase as natural gas prices recently pushed through the price of equivalence between coal and gas power.
Edited by Jonathan Rowland.
Read the article online at: https://www.worldcoal.com/coal/15122015/not-a-pretty-picture-bofa-merrill-lynch-coal-outlook-2016-3289/