Newsmax TV & Webwww.newsmax.comFREE - In Google Play
Newsmax TV & Webwww.newsmax.comFREE - On the App Store
Tags: coal | output | mining | margins

Coal Output to Shrink as Mining Margins Shrink

Tuesday, 24 July 2012 09:54 AM EDT

Global coal output is set to shrink over the next year or two as miners grapple with a combination of low prices driven by cheaper alternatives, weak demand, and cost and currency headwinds.

Output has already begun to fall, but so far only by a couple of millions of tonnes - a tiny fraction of the global annual seaborne coal trade of 750 million. Analysts and industry executives say cuts could soon reach dozens of millions of tonnes to bring supply in line with weaker demand in China and Europe.

The United States is already cutting due to low prices and competition with cheap shale gas, while high-cost Russian and Australian miners are also trimming production, and even lower-cost rivals could follow suit due to high labor costs and strong local currencies.

It could take a couple of years for the market to find a balance, prolonging a period of painfully low profits for higher-cost miners while helping out utilities, steel firms and cement makers with low input prices.

"The current oversupply predicates production cutbacks and the delay or cancellation of expansion plans," Bank of America Merrill Lynch said this month. "Although we expect the surplus to shrink in 2013, it will not disappear," it added.

Coal, particularly thermal coal for power generation, is the second biggest dry bulk commodity market in the world by trade volumes, but its illiquid spot market is prone to price booms and busts.

Prices peaked at over $200 a tonne before the 2008 financial crisis, then fell sharply with other commodities before stabilizing for the next few years at around $100-$125 due to booming Chinese demand.

During the latter period, miners almost everywhere in the world ramped up coal output on the assumption that China and to a lesser extent India would absorb it all without depressing prices, but they hadn't reckoned on booming U.S. shale gas production and a slowing of Chinese demand.

"In thermal coal the most important development has been the rise in U.S. exports and the re-direction of previous coal exports to other markets due to U.S. shale gas production," said Evy Hambro, managing director at BlackRock, the world's largest money manager.

"U.S. mines are seeing a closure of capacity or going into bankruptcy protection," he added.


U.S. domestic coal prices have fallen much faster and more steeply than global prices, according to Reuters data. U.S. miner Patriot Coal filed for Chapter 11 bankruptcy protection this month.

China produces half the global annual coal output of 4 billion tonnes and also imports large volumes from Australia, Indonesia, South Africa, Russia and Columbia. The United States produces 550 million a year and has also emerged as a big exporter because of the shale gas boom.

Outside the United States, coal prices have stabilised at around $85 per tonne since May, but the real problem is that this price is already below cost for some producers.

"If prices stay at $85, then much more coal will have to fall out. In the next couple of months, I think you will see 15-20 million tonnes will have to drop globally," an Indonesian producer said.

Global major Rio Tinto said last week it was cutting jobs at its Australian Clermont thermal coal mine, while exporters said Russia is likely to lose 6-8 million tonnes of thermal coal exports in 2012 due to production cuts begun in the past month.

Miners usually try to ride out periods of depressed prices without cutting output until they have no other choice because cuts inflate their costs per tonne, but this time the market feels prices might slide further if deeper cuts are not made.

"For example, Russian miners are looking at stopping expansions and trimming capex spending; they're focused on upgrading and washing their output to increase margins on sales because they can't do anything about the rail costs," said Rudi Vann, coal analyst with Wood Mackenzie consultancy.

Costs in most exporting countries have soared in recent years. Russia has historically been the highest-cost coal exporter by a substantial margin because of the thousands of kilometres coal must travel by rail from Siberian mines to ports.

But some U.S. and Australian miners now also have cash costs matching Russia's of up to $100 a tonne at port while facing a spot coal price of less than $90 including shipping costs.

"Labour inflation is severely impacting the Australian industry both in operating and capital costs," said Vann.

Large miners in South Africa and Indonesia seem best placed, with the lowest costs at $30-$50 per tonne.

Hambro from BlackRock said another negative factor was the relative strength of currencies in producing countries.

Russia and South Africa have recently seen some weakening of the rouble and rand in a move that might help exporters, but steep rallies in the Australian dollar and Colombian peso since 2008 have made life very difficult for exporters in those countries as they sell coal in U.S. dollars but face soaring costs in local currencies.

"The movement of the exchange rate is an atomic bomb for producers," said a coking coal trader from Colombia, where costs have come dangerously close to export prices.

As of Tuesday, Colombia's peso has firmed about 9 percent against the dollar so far this year, making it one of the strongest gaining currencies in the world.

© 2023 Thomson/Reuters. All rights reserved.

Tuesday, 24 July 2012 09:54 AM
Newsmax Media, Inc.

Sign up for Newsmax’s Daily Newsletter

Receive breaking news and original analysis - sent right to your inbox.

(Optional for Local News)
Privacy: We never share your email address.
Join the Newsmax Community
Read and Post Comments
Please review Community Guidelines before posting a comment.
Get Newsmax Text Alerts

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

© Newsmax Media, Inc.
All Rights Reserved
© Newsmax Media, Inc.
All Rights Reserved