Coal Crippled by Supply in Worst Quarter in Year: Energy MarketsBen Sharples
Coal prices in Asia are showing little sign of recovery after the biggest quarterly decline in a year amid subdued demand and increasing supply from Australia and Indonesia, the world’s largest exporters.
Prices of the power-station fuel at the Australian port of Newcastle, the Asian benchmark grade, may trade between $80 and $90 a metric ton for the rest of the year, according to UBS AG, while Bank of America Corp. forecasts an average $86 a ton this year, down from an earlier estimate of $92. Coal has dropped 7.5 percent to $81.20 a ton in the second quarter, the most since the three months ended June 2012, IHS McCloskey data show.
Glencore Xstrata Plc, the world’s biggest shipper of the fuel, and Peabody Energy Corp., the largest U.S. producer, are among miners cutting workers to cope with escalating costs and falling prices as exports from Australia, Indonesia and the U.S. climb. Supplies are forecast to rise at least 30 million tons as new mines start this year, data compiled by UBS show. About 15 percent of Australia’s coal is extracted at a loss when prices fall below $90 a ton, according to CIMB Group Holdings Bhd.
“The market has been impacted by oversupply, particularly from Indonesia, Australia and the U.S.,” said Daniel Hynes, the Sydney-based head of commodity strategy at CIMB. “For the next couple of months, it looks like things will remain relatively weak. There is still a little bit of risk to the downside for prices,” he said, predicting prices may climb to $95 a ton by the end of the year.
Coal at Newcastle has dropped 10 percent in 2013, extending a 19 percent slump last year, the most since 2005, according to IHS McCloskey, a Petersfield, England-based data provider. It fell 17 percent in the second quarter of 2012 as exports rebounded after rain swamped mines and rail lines in Australia, the world’s second-biggest shipper of the fuel.
The market is being affected by “crippling oversupply and subdued demand,” Bank of America analysts including Sydney-based Peter O’Connor said in a June 20 note. The worst isn’t over for thermal seaborne coal, and low prices might be necessary to force production cuts, the bank said.
“Even though there have been cutbacks in some supply, it has been at the margin, and more mines have been opening,” said Daniel Morgan, a commodity analyst at UBS in Sydney. “It’s a well-supplied market at the moment.”
Australian exports have climbed 11 percent to 56.4 million tons for the four months ended in April, compared with the year-earlier period, according to UBS. Shipments from Indonesia, the world’s biggest seller, rose 6 percent, while U.S. exports gained 10 percent, UBS said June 19.
The outlook is “grim” for mining as companies adapt to lower prices and weakening demand, Mark Cutifani, the chief executive officer of Anglo American Plc, said at a conference today in the Australian capital of Canberra.
Glencore Xstrata halted work on the Balaclava Island export terminal in Queensland in May, citing market conditions including overcapacity. The Baar, Switzerland-based company also shut its Brisbane, Australia office in March after saying in September that it planned to cut about 600 jobs.
Glencore Xstrata is still scheduled to start production this year at three Australia mines with total export capacity of
12.5 million tons, according to UBS.
St. Louis-based Peabody has taken control of most of its Australian sites from contractors to limit losses, it said in its first-quarter earnings statement in April. Early-stage projects continue to be deferred, with timing dependent on market conditions, the company said.
“We’re still fairly confident by the end of the year we’ll see prices higher from here,” Hynes said. “It will just be a long grind up over the course of the second half. There is still a modest recovery in place at the moment through emerging markets and the U.S., which will be supportive of industrial growth, and we should see coal demand pick up.”
Economic growth in China, the world’s biggest consumer of coal, may accelerate by the end of the year, Jun Ma, the chief economist for Greater China at Deutsche Bank AG, said at a conference in Hong Kong on June 25.
Newcastle prices may average $92.70 in 2013, according to the median estimate of 11 banks compiled by Bloomberg including Credit Suisse Group AG, Societe Generale SA and Westpac Banking Corp. The fuel has averaged $88.78 this year.
The market will remain well-supplied in the short term, with a lack of “producer discipline,” especially among Indonesian miners, Lucky Ariesandi, an analyst at Maybank Kim Eng Securities in Singapore, said in a June 24 report. Production cuts in Indonesia are imminent as miners can maintain low strip ratios only for a limited time before being forced to alter long-term plans, Ariesandi said, reducing his 2013 Newcastle price projection by 7 percent to $88 a ton.
Supply continues to grow from miners trying to optimize production while demand remains subdued, Sam Catalano, an analyst at Nomura International Plc in London, said in a June 6 note. If U.S. producers can lower costs, their exports may become more sustainable, he said, reducing his 2013 price estimate 9 percent to $90 a ton.
U.S. exports are projected to increase 10 percent to 55 million tons this year, according to a report today from Australia’s Bureau of Resources and Energy Economics. Indonesian shipments are forecast to gain 6 percent, while Australia sales will advance 7 percent, the Canberra-based bureau said.
“We don’t have a whole lot of confidence in a near-term uplift, but we don’t think prices are headed for an imminent collapse,” said Joel Crane, the vice president of research at Morgan Stanley. “A supply response from producers is what’s needed to fix the market.”
To continue reading this article you must be a Bloomberg Professional Service Subscriber.
If you believe that you may have received this message in error please let us know.
- Uber Victim Stepped Suddenly in Front of Self-Driving Car
- Apple Is Secretly Developing Its Own Screens for the First Time
- How Facebook Made Its Cambridge Analytica Data Crisis Even Worse
- Stocks Slump as Facebook Hits Tech; Bonds Recover: Markets Wrap
- From a $126 Million Bonus to Jail: The Fall of a Star Trader