Sharp drop in coal prices likely

From IEEFA:

Market sources say thermal coal prices appear poised for a sharp drop that could seriously squeeze producer profit margins, especially for high-cost mining companies. A number of thermal coal producers facing high-cost structures are in Australia, Russia and the U.S., and could be among those vulnerable to lower prices, sources said.

They stressed, however, that it could be a long, drawn-out process before higher cost producers are forced to withdraw from business due to certain fixed costs.

Take-or-pay costs in terms of transport to market and port charges mean coal miners can be incentivized to keep on producing despite low market prices. Added to this, mothballing mines or putting them on to a care-and-maintenance basis can be expensive, another reason to keep high-cost mines going, sources said. A source said he had seen certain coal producers carry on their operations on a negative cash flow basis rather than exit the industry.

In the last market downturn a few years ago, some coal producers in Australia opted to maximize their production to retain market share, despite the effect of this strategy on coal prices and the wider market.

Demand from Taiwan-based power plants is looking weak due to cooler weather, market sources said, pointing to the fall in Newcastle 6,000 kcal/kg NAR prices. “Power consumption is coming down, coupled with pressure to reduce coal use, so coal demand in Taiwan is unlikely to go up in the near term,” a Taiwan-based market source said. The same source added that even low prices are unlikely to prompt much buying interest for now due to low demand.

A trader in China said finding willing customers for Australian high-ash cargoes was increasingly difficult. “There is no place to sell cargoes,” he said of the China market.