As far as commodity news goes, oil has been making most of the headlines over the past few months. In a tale all too familiar to the coal industry, a glut of supply (courtesy of a boom in US production) and a slowdown in global demand have seen prices collapse from over US$100/bbl in mid-2014 to around US$50/bbl for West Texas Intermediate.Oil producers – so used to announcing huge profits – are feeling the pain. Royal Dutch Shell’s oil production business made almost no money in the last quarter of 2014; the company has since announced US$15 billion in spending cuts. Meanwhile, BP made a headline loss in 4Q14: it has slashed its expected CAPEX by 20% on the likelihood that oil prices will remain low in the medium term. Even mighty ExxonMobil saw its quarterly profits fall 21% in 4Q14. Beyond the oil patch, however, and low oil prices are a boon – particularly at the pump. Here in the UK, petrol prices have dropped from well over £1.30 for a litre of unleaded petrol to around £1.05/l – a welcome relief from the recent norm of ever-rising living costs. As the Financial Times said in a recent comment: “Lower oil prices […] benefit households almost immediately through cheaper petrol and other fuels. An unexpected fall in the general price level raises real incomes. This is particularly welcome in the UK, where real median household incomes last year were 6% lower than before the global financial crisis, despite a relatively healthy economic recovery.”1Low oil prices should also prove a boon at the mine, where diesel is often the second-largest cost after labour at large opencast sites. Indeed, according to Deloitte, energy costs can account for 30% of mining operating costs – as well as significantly impacting the transportation costs of moving coal from pit to port.2 Lower diesel prices could therefore have a large impact on miners’ costs at a time when the cost of production is key. This should help keep more mines above the cost curve – at least in the short term. But while that is good news for miners, it could prove a mixed blessing for the industry as a whole, if it helps to maintain the current imbalance in supply and demand that is keeping coal prices in the doldrums. Indeed, low oil prices could end up prolonging the downturn in the coal industry, pushing coal prices even lower, as coal production that had been marginal is kept online. It is yet another potential headache for the industry to cope with at the start of a year that does not promise much by way of reprieve from the doom and gloom that has dominated the last twelve months. References“FT View: A falling oil price is good for the world economy”, www.ft.com (19 December 2014). “Tracking the trends 2015: The top ten issues mining companies will face this year” (Deloitte; 2015), p. 15.
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