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Coal Falling Most Since 2009 Prompts Goldman Price-Forecast Cut

Thursday, 08 August 2013 07:38 AM

Coal’s biggest slump in four years is prompting banks from Goldman Sachs Group Inc. to Citigroup Inc. to cut price forecasts in Asia amid rising supply from Australia and Indonesia, the world’s largest exporters.

The power-station fuel at the Australian port of Newcastle may average $85 a metric ton this year, according to the median estimate of five banks in a Bloomberg survey. Coal has slipped as much as 19 percent in 2013 to trade at $76.25 last month, the lowest since November 2009, data from IHS McCloskey show. Prices have averaged $86.47 a ton during the year. They were at $76.70 Aug. 2. Goldman Sachs lowered its 2013 forecast by 7.6 percent last month, while Citigroup reduced its estimate 6.7 percent.

The slide in prices, coupled with rising production costs and slowing Chinese demand, is prompting miners from Glencore Xstrata Plc, the world’s biggest shipper, to Peabody Energy Corp. to cancel projects and fire workers. About 20 percent of Australian coal is extracted at a loss at $77 a ton, according to CIMB Group Holdings Bhd. Government officials, port operators and producers will meet next week at the Coaltrans conference in Australia to discuss the challenges facing the industry.

“Things in the Australian coal market are pretty bad,” Paolo Coghe, an analyst at Societe Generale SA in Paris, said in a telephone interview from Paris. “The market has perhaps been too optimistic when it comes to factoring in slowing Chinese demand.”

Price Slump

Coal at Newcastle slipped 10 percent in June to $77.75 a ton, the biggest monthly decline since February 2009, according to IHS McCloskey, a Petersfield, England-based data provider. Prices averaged $76.70 a ton in July, the lowest monthly mean since October 2009. They slumped 19 percent in 2012.

“The sector is facing a number of very strong headwinds,” Harry Kenyon-Slaney, the chief executive officer of Rio Tinto Group’s energy unit, said in a speech in Brisbane last month. “The list includes sharply increasing costs, weaker markets, declining productivity, prices falling from historic highs and a strong local currency.”

Employee costs in Rio’s Australian coal business have more than doubled since 2008 compared with an increase in production of 10 percent, the company said in April. The Australian dollar averaged about $1 in the past three years, compared with about 70 cents in the prior two decades, making coal exports more expensive for foreign buyers. It has retreated 13 percent this year to about 90 cents.

Chronic Oversupply

About 11,000 jobs in the coal industry have been lost during the past year, Kenyon-Slaney said July 12, citing Australian Resources Minister Gary Gray. Prices of steelmaking coal have also declined this year, slipping as much as 20 percent, data from Energy Publishing Inc. compiled by Bloomberg show.

“Chronic” oversupply has been one of the reasons for depressed thermal coal prices, Citigroup said in a July 15 note, cutting its Newcastle forecast to $83 a ton, from $89. Export volumes from Australia remain strong, the bank said.

Port Waratah Coal Services, the operator of two of the three export terminals at Newcastle in New South Wales, shipped a record 10.3 million tons in July, the company said Aug. 2. That compares with the previous high of 10.2 million set in December, the company said.

Shipments from Australia, the world’s second-biggest exporter, are projected to rise by 7 percent to 183 million tons this year, according to a June report from Australia’s Bureau of Resources and Energy. Indonesia may sell 6 percent more, the report shows.

‘Favorable Changes’

The market looks set to remain in surplus for some time, Paul McTaggart, an analyst at Credit Suisse AG in Sydney, said in a July 3 note, cutting its forecast 4 percent to $86 a ton. Supply growth is poised to slow next year and may offer the opportunity for demand to catch up, Credit Suisse said.

Newcastle prices may average $96 a ton next year, according to the median estimate of 10 banks compiled by Bloomberg including Societe Generale and Bank of America Corp. The fuel rose as high as $94.05 in February, data from Petersfield, England-based IHS McCloskey show.

“The overhang in seaborne supply represents follow-through from projects that were initiated in recent years when prices were higher,” Gregory H. Boyce, the chief executive officer and chairman of St. Louis-based Peabody, the largest U.S. producer, said last month. “Still, we’ve seen favorable changes to both the supply and demand picture globally and we do not believe that current prices are sustainable in the long term.”

China’s Demand

Peabody is cutting expenses by shrinking its workforce and taking control of most of its Australian sites from contractors to limit losses, it said in its second-quarter earnings statement on July 23. The company is aiming to reduce costs in Australia to the “mid-$70 per ton range” this year, from a previous estimate of $80, it said.

In the absence of stronger demand from China, the most likely catalyst for an eventual recovery is a further round of production cuts, Christian Lelong, an analyst at Goldman Sachs in Sydney, said in a July 24 note, cutting its forecast to $85 a ton, from $92. The resilience of seaborne suppliers in the face of low prices has prevented mine closures on a larger scale and contributed to an extended period of oversupply, the bank said.

Coal demand in China, the world’s biggest buyer, rose 1.8 percent in the first six months of this year to 1.93 billion tons, the China National Coal Association said in a statement on July 18. The gain was 1 percentage point down from the same period last year and 7.6 points lower than in 2011.

The annual Coaltrans conference runs from Aug. 12 to Aug. 13 in Brisbane, Australia.

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Coal's biggest slump in four years is prompting banks from Goldman Sachs Group Inc. to Citigroup Inc. to cut price forecasts in Asia amid rising supply from Australia and Indonesia, the world's largest exporters.
Thursday, 08 August 2013 07:38 AM
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