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Global Coal Update
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Companies are demonstrating again that costs follow prices – up and
down. Ourwork shows that while backward-looking cost curves offer
hope that a large share of production is unprofitable, after adjusting for
weaker commodity currencies and lower costs, most tonnage only incurs
losses equal or less than the take–or–pay sunk cost. Additionally, lower
coal prices in China are reducing that country’s appetite for imports.
Consequently, we’ve lowered our coal prices a little more, to recognize
miners’ resilience.Areas to watch are the US where coal shortages could
cause a crisis and India where, if the weak El Niño monsoon continues;
reduced hydro power supplies should lift thermal coal imports.
Met coal for Q3 settled at $120/t; we’ve modestly lowered our
coking and thermal coal pricesto recognize the miners’ abilities to
drive costs down and keep the coal flowing. Already lower thermal coal
prices are being used to explain strong demand growth for this fuel and
economies of scale may yet help troubled miners’ economics. Yet in the
short term, the markets remain oversupplied, especially in Asia. With
Take-or-Pay contracts probably stretching out at least two years, this
could be a slow basing process.
Oversupply of Chinese thermal coal has depressed imports. Chinese
steel production is holding up, but exports have also been rising. Since
most Chinese steel uses domestic coking coal, this seems to be a net
negative for the seaborne coking coal price.
New pressure to reduce carbon emissions came from the US’s EPA.
The new rule is out for debate and will be finalized in about a year;then
we expect legal challenges. Hence it’s impossible to know what the rule
will look like when or even if it’s implemented. We suspect Exxon is on
the right track when it says it expects carbon pressure will continue but
efficiency improvement is the most practical solution and the most
draconian cuts to emissions are not supportive of political realities in
non-developed economies.
Indians we talk to were euphoric about new PM Modi’s success but
his first challenge could be a weak monsoon and thus a weaker
agricultural economy. However, less rain should mean reduced hydro
power and bigger demand for imported coal
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