--Clyde Russell is a Reuters columnist. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Aug 5 Prices for thermal
and coking coal appear poised to diverge, with the power-plant
fuel remaining mired in the doldrums and the steel-making
ingredient posting modest gains.
The halving of thermal coal prices since early 2011 has
grabbed the most attention in the beleaguered industry, but
coking coal has actually performed worse, dropping by almost
two-thirds since its post-2008 recession peak in mid-2011.
The 2011 high was reached after severe flooding in
Queensland state, the main coking coal producer in top exporter
Both types of coal have been plagued by oversupply, which
has swamped the modest increases in demand in top importers
China and India.
The problem for thermal coal has been supply hasn't
significantly been cut despite weak prices. Producers in the top
two exporters Indonesia and Australia have been instead trying
to cut costs and increase volumes in order to boost revenues.
Australian producers have another problem, the so-called
"take-or-pay" contracts that commit them to paying for transport
costs whether they actually ship coal or not.
These contracts can be upwards of $20 a tonne, meaning that
as long as a miner's loss per tonne is below that level, it's
cheaper to continue producing than it is to shut down.
This has kept Australian exports of coking and thermal coal
rising despite the slide in prices.
Thermal coal has the added problem that other major
suppliers aren't cutting exports either, with Indonesia expected
to increase volumes in 2014 and South Africa likely to hold
exports more or less steady.
Only North American exports are contracting, with several
major producers announcing mine closures or cutbacks in recent
months. This will result in lower exports for both thermal and
coking coal from North America, but the impact is likely to be
more keenly felt in coking coal.
It appears that there is a better chance of the decline in
coking coal exports from North America matching the increase in
shipments from Australia.
AUSTRALIAN EXPORTS TO RISE, U.S. TO DROP
Australia will export 175 million tonnes of coking coal this
year, a gain of 2.9 percent from 2013, and 183 million tonnes in
2015, according to government forecaster the Bureau of Resources
and Energy Economics (BREE).
BREE also estimates that coking coal exports from the United
States will drop 4.6 percent this year to 56 million tonnes.
These figures imply that Australian supply will increase by
about 2 million tonnes more than U.S. exports decline.
The risk is that Australian coking coal exports don't
increase by as much, especially if more miners limit output or
are successful in negotiating easier take-or-pay terms.
It's also possible - with coking coal prices currently
holding around $120 a tonne for third quarter contracts - that
U.S. producers will idle more mines.
A stronger U.S. economy will also increase domestic demand
for coking coal, making less available for export.
Chinese customs data already shows how imports from the
United States are diminishing, with a 60 percent year-on-year
decline to 1.423 million tonnes in the first half of this
Shipments from Canada dropped 46 percent and those from
Russia by 26 percent, the data show.
However, China's imports from Australia, which supplies
almost half of the country's total coking coal imports, rose
13.2 percent to 15.02 million tonnes, while second-ranked
supplier Mongolia increased its shipments 16.2 percent to 7.53
Overall, coking coal imports fell 12.3 percent in the first
half from the same period in 2013.
This suggests that coking coal imports may be due for a
rebound, given ongoing strength in China's steel sector.
Crude steel output rose 3 percent in the first six months of
the year from the same period last year, according to official
This implies China's demand for coking coal should be
rising, and with domestic production likely flat to slightly
lower, imports should rise as stockpiles deplete.
However, while coking coal prices may have reached the
bottom, a sustained rally appears unlikely as strong gains will
lead to higher U.S. exports.
For now, coking coal producers can look forward to modest
price gains, while thermal coal miners fret about how much
further prices can fall.
(Editing by Tom Hogue)