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Met coal prices reach bottom with limited upside

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World Coal,

Metallurgical coal prices may have hit bottom, according to Moody’s Investor Service; however, continued growth in global supply will keep prices low for the next few years.

Benchmark prices remained at the US$120/t level for the second quarter in a row in June, providing some hope that prices have bottomed out. At this level, Moody’s believes that as much as half of global production is loss making, including as many as a quarter of producers in Queensland.

Some rationalization of supply is thus likely over the next 18 months, providing a modest recovery in prices. But take-or-pay contracts in Australia will continue to mean that more coal is brought to market, weakening any price recovery.

BHP Billiton, the world’s largest miner, recently announced record metallurgical coal production of 45 million t for the year to June 2014 on the back of record Australian production. A further 30 million t of capacity is due to come online over the next three years in the country from projects that have already started or preparing to commence construction.

This growth will offset any capacity curtailments in Australia in the next twelve months and will lead to growing exports after that, said Moody’s. As a result of this continued downward pressure, Moody’s expects only a small increase in prices to US$135 – US$145/t by the end of 2015 with prices struggling to rise higher than that for three years after that.

At that level, Moody’s believes US miners will continue to struggle: “We believe that as a group, key US met producers [including Peabody, Alpha Natural Resources, Arch Coal and Walter Energy] will [burn] well over US$1 billion in cash in 2014.” Only when benchmark prices reach the US$160 – US$170/t range will the group become cash positive.

But by that time, Australian producers are likely to have grown their market share of Chinese imports, leaving US miners reliant on growth in domestic and European steal industries to maintain production volumes.

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