Coal news and updates

Australia thermal coal price at 8-year low

The price of high grade Australian thermal coal — the main benchmark for the Asian market — has fallen to an eight-year low due to a glut of the fuel.

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Glencore is one of the world’s biggest producers and traders of thermal coal, mining about 150m tonnes a year. In the six months to June, the fuel generated more than $1bn of underlying earnings for the UK-listed company — about 20 per cent of the total.

Anglo American and Rio Tinto also operate coal mines, but theirs make up a much smaller percentage of group revenues and profits. In August, Glencore said a 10 per cent fall in coal prices would shave about $235m off its mining division’s operating profits in the second half.

This week coal shipped from the Australian port of Newcastle with an energy content of 6,000 kcal/kg, was assessed at $54.88 a tonne by Argus, a price reporting agency. That is the lowest level since 2007 and a 9.6 per cent drop since the end of June. Coal is 70 per cent below its 2009 peak.

Unlike copper and oil, which have large, publicly traded derivative markets to provide clear prices, coal is more opaque, based primarily on physical transactions.

The latest price decline comes as Australian producers — led by Glencore — concluded their quarterly supply discussions with key customers in Japan, where thermal coal is the largest source of energy for power generation and utility companies.

While they are prepared to pay a premium to secure the high grade coal, people familiar with the negotiation said Glencore and Tohoku Electric Power agreed a price of $64.60 for the contract that will run for a year from October. That was about $3 a tonne lower than the last big contract settlement in April and almost $9 a tonne above the agreement at the same time last year.

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But with the Australian dollar down 17 per cent against the US dollar over the past year, Glencore has realised a higher price in local currency terms than in April — about A$89 a tonne compared with A$86 in April.

Falling commodity currencies along with lower oil prices and contract costs have thrown a lifeline to struggling coal miners in Australia, Russia and South America.

Bankers said this explained why there was still interest in high quality coal assets. Last month, Rio sold a 40 per cent stake in an Australian coal mine for $606m, in a deal that could pave the way for further divestments.

Rio has been in talks with X2 Resources, an investment company run by former Xstrata head Mick Davis, over a possible sale of coal assets in New South Wales.

While the decline in thermal coal has been less severe than in metals, many industry observers say the outlook remains challenging as demand slows from China, which has imposed import tariffs on seaborne coal in an effort to protect its domestic miners.

“The current oversupply of coal has been compounded by the ongoing global economic uncertainty,” said Peter Freyberg, the head of coal at Glencore in a speech on Wednesday in Australia. “Growth rates in much of the developing world — most obviously in China — have slowed considerably.”

Another reason is cost deflation, which has delayed the rebalancing of the market. With costs falling faster than prices due to lower oil prices and weaker commodity currencies, marginal producers are continuing to pump material into the market rather than mothball production.

“Chinese import collapse cannot be offset by demand growth elsewhere. Prices need to inflict enough pain for supply cuts to materialise,” analysts at Macquarie said in a recent investor presentation.

source: http://www.ft.com