Editorial comment
The global coal market is in something of a mess. A growing glut in supply has knocked the price of thermal coal delivered to Europe down by 30% since October. At US$ 83/t, it is now at loss-making levels for some higher-cost US and Russian producers, as well as smaller mines in South Africa, Colombia, Australia and Indonesia. Where did it go wrong?
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There are two factors at play. On the supply side, the scale of US exports has taken the market by surprise. US domestic demand has been hit by a warm winter, ultralow gas prices and tighter environmental regulations, forcing US producers to try and export a lot of spare capacity. This comes on top of capacity expansions in almost every other major exporting country and a loosening of some logistical bottlenecks.
According to coal industry dogma, however, this should not have been a problem, as China, along with India, was expected to require as much coal as the rest of the world could provide. But a bigger-than-expected economic slowdown in the Middle Kingdom, high inventories in the key southern coastal regions, and recent defaults on cargoes by Chinese buyers have started to change that belief – at least in the short term (see this month’s The Monitor, p. 10): “China doesn’t look likely to provide an upside demand surprise which could clean up the market in the near term. It’s more the long-run demand picture that looks balanced”, said Marcus Garvey, an analyst with Credit Suisse (for more on long-term market potential from the perspective of a US coal producer, see pp. 91 – 92).1
Meanwhile, demand for coal elsewhere, which had been propped up by the German and Japanese decisions to cut back on nuclear power, has also been softer than expected as economies remain weak in Europe and Asia.
Measures to rebalance the market are becoming increasingly urgent. Pressure is already mounting on US producers to cut supply, particularly as US utilities have started to cancel contracted tonnages and are even looking to sell coal from inventories that are running at record levels. But reducing output (or ramping it up) cannot be done as quickly in the mining industry as, say, in the oil industry, making producers reluctant to take such action – and hitting hopes for a quick fix. The ride down to market bottom looks to have a way to go yet.
1. Marcus Garvey was quoted in: COWHIG, J., “China Coal defaults shred price rebound hopes”, IDF (Thompson Reuters; 25 May 2012), p. 3.
