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Peabody sees coal demand rising but supply overhang remains

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World Coal,

Peabody painted a fairly gloomy picture of the global coal industry, despite increased coal demand in some sectors. “Continued supply overhang has led to seaborne coal price declines,” said Gregory Boyce, chairman and CEO of Peabody, in a statement. Q2 metallurgical price benchmark dropped US$ 23/t from Q1, while the annual thermal benchmark for Newcastle-quality coal settled at US$ 81.80/t, down from US$ 85/t last year.

Despite the price pain, there were some bright spots in demand. “Near-term stimulus activities in China and limited supply increases are expected to lead to improved market fundamentals later this year and into 2015," said Boyce.

Asian coal giants: China, India and Japan

China announced a US$ 175 billion stimulus package to improve economic growth, as well as unveiling plan to move 15 to 20 million people into cities each year by 2020. The country also plans to close over 1700 smaller mines with nearly 120 million t of capacity in 2014 to phase out low-quality production. Rising domestic labour, safety and rail costs continue to favour strong import levels, with China's total coal imports increasing by 5% to 84 million t through March of this year.

Meanwhile, India's coal generation is up 9% through March from the continued addition of new coal-fired generation. Total coal imports have been stable through the first three months of 2014 as a decline in thermal coal imports has been offset by higher metallurgical coal imports. Domestic production shortages, rising currency and growing demand is expected to lead to record 2014 coal imports.

Japan's coal imports are up 11% through February on growing power generation and steel production. Coal generation has risen 12% in the first three months,and utilities are planning to increase coal generating capacity over the next decade as Japan returns to coal to fuel their economy after switching off its nuclear capacity after the Fukoshima disaster.

Europe: Ukraine crisis proves coal’s value

“Coal's important role in energy security is again prominent as Ukraine's energy minister has called for increased coal use to counter rising natural gas prices,” Peabody said in a statement. Meanwhile, Poland’s prime minister, Donald Tusk, has argued that his country’s coal resources should become a cornerstone in Europe’s defense against a newly aggressive Russia.

“In the context of the Russian-Ukrainian conflict, the overriding objective is to lessen the dependence on Russia,” Mujtaba Rahman, an analyst at Eurasia Group, told Bloomberg. “Climate objectives will be absolutely secondary to that.”

Rebalancing supply and demand

Peabody expects seaborne metallurgical coal supply growth to moderate in 2014, as most projects that were started in a higher-priced environment are completed and industry investment is dramatically reduced. US metallurgical coal exports have declined an estimated 12% through March and Australian export growth is expected to slow as the year progresses.

In the medium-term, Peabody projects demand for seaborne metallurgical coal to grow 10 – 15% from 2013 to 2016, led by ongoing urbanisation and industrialisation in China and India. The company also noted that European steel demand grew by 7% in Q1 on the back of improved economic conditions.

Seaborne thermal coal demand is forecast to rise 20 to 30 million t in 2014, said the coal miner, while global coal demand is expected to increase 700 million t over the next three years as the company estimates that approximately 250 GW of new coal-fired generation will be built over the next three years. This will require an additional 750 million t of thermal coal at expected capacity utilisation.

"Longer-term global urbanisation trends will drive continued coal demand growth, while seaborne coal supplies are likely to be constrained by deferred investments and removal of production at the high end of the cost curve,” concluded Boyce.

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