--Clyde Russell is a Reuters columnist. The views expressed
are his own.--
By Clyde Russell
LAUNCESTON, Australia, April 28 Coal producers
in Asia are currently their own worst enemies, raising output in
a bid to boost revenue in order to compensate for lower prices.
Economic logic would suggest that when the product you make
is in oversupply, eventually prices will fall to the point where
output becomes loss-making and is shut down.
However, this logic isn't applying to Asian coal markets,
with miners ramping up output by more than demand is increasing.
The short-term impact has been that spot prices have
tumbled, with benchmark Australian thermal coal at Newcastle
Port dropping to $73.12 a tonne in the week to
April 25. That is not far from a four-and-a-half-year low of
$72.98 hit last month.
The price is also down 15 percent so far this year and has
almost halved since the post-2008 recession peak of $136.30 a
tonne, reached in January 2011.
The response to this collapse in pricing has resulted in
some production leaving the market, most notably in China and
the United States.
But the main coal exporters of Australia and Indonesia
appear to be increasing output, with miners perhaps betting each
other that they won't be the first to go bankrupt.
BHP Billiton, the world's biggest miner, raised
output of thermal coal by 14 percent and coking coal by 28
percent in the quarter ended March 31 from the same period a
While acknowledging that times are tough and prices are
unlikely to improve any time soon, BHP's view is that by pushing
for volumes it can lower unit production costs and thereby
This view seems to be shared by other miners, with the
Australian government's Bureau of Resources and Energy Economics
forecasting in its March quarter report that the nation's 2014
exports of thermal coal will rise 3.7 percent to 195 million
tonnes, having expanded by 10 percent in 2013.
While that does represent a slowing in the rate of growth,
the fact that they are expected to increase at all in the
weakest price environment since the global recession shows that
market forces appear not to be working in coal.
Australian miners are also hampered by "take or pay"
contracts for rail and port, meaning they have to pay for the
capacity to export whether they use it or not.
This means it's often cheaper to continue mining and
exporting at a loss than it is to simply shut down a mine.
This can be seen in the shipment figures from Newcastle, the
world's biggest coal export harbour, which have been robust in
April's projected exports are 12.49 million tonnes, up from
11.86 million in March and close to the 12.97 million tonnes in
January, which was the highest since April last year.
INDONESIANS MINING MORE
Indonesian producers are also planning on increasing output,
having convinced the government to allow 2014 production to at
least match that of 2013, reversing an earlier decision to cut
it to 397 million tonnes from 421 million.
So far Indonesian output is running ahead of target, with
110 million tonnes mined in the first quarter, according to an
April 14 report in Investor Daily.
The top six Indonesian producers want to increase output by
an average 11.7 percent in 2014, according to a Reuters poll on
With the top two exporters planning on shipping more this
year, is there any chance that demand growth will match
Top buyer China expects coal imports to be more or less the
same this year as the 267 million tonnes in 2013, when they grew
Chinese coal markets remain well-supplied even though
domestic producers have seen profits slashed by the low prices.
Domestic output rose 0.9 percent to 535 million tonnes in
the first two months of the year compared to the same period
last year, according to an industry website.
While China isn't expected to provide a boost for coal
producers, there are some bright spots, chief among them India.
Coal imports by Indian power producers rose 31 percent to 66
million tonnes in the period from April last year to January
this year, the country's power minister said Feb. 20.
India's coal imports rose 21 percent to 152 million tonnes
in 2013 and could rise to 170 million tonnes this year, research
firm OreTeam said Jan. 22.
Japan, Asia's third-largest coal importer, boosted imports
by 9 percent to 48.98 million tonnes in the first quarter from
the same period in 2013.
The ongoing absence of nuclear generation and high prices
for liquefied natural gas have boosted coal use in Japan, a
situation that may persist for the rest of the year.
Number four importer South Korea has boosted purchases by
4.6 percent to 30.15 million tonnes in the first quarter over
the same period in 2013, as it also battles nuclear shutdowns
and high LNG costs.
Rising demand provides some optimism for Asian coal miners,
but the reality is that this increased consumption can be more
than easily met and is unlikely by itself to boost prices.
Also, if prices do increase, U.S. producers will be able to
resume exports to Asia, thus providing a cap on any possible
It seems the current tactic of trying to increase output in
order to lower unit costs and boost revenue is somewhat
self-defeating, especially since many miners are attempting the
same thing at the same time.
Hoping you have deeper pockets than your neighbour doesn't
seem a particularly smart or sustainable business plan, but it
appears that is the only game in town currently.
(Editing by Muralikumar Anantharaman)