Coal news and updates

Australian mining companies are prolonging a supply glut that’s driven coal prices to a four-year low because of freight contracts that make it cheaper to ship at a loss than to cut output.

 

Shipments of thermal coal from the second-biggest exporting nation will expand the most of any country this year, according to Morgan Stanley. The bank cut its 2014 price forecast by 9 percent to $77 a metric ton earlier this month, estimating global supply will outstrip demand by 4 percent. Prices averaged $77.24 so far this year, according to globalCOAL data.

 

Miners are tied to port and rail contracts that oblige them to pay transport fees even if they don’t ship any coal. The slump in prices means as much as two fifths of shipments lose money, Morgan Stanley said in an April 8 report. Standard Bank Group Ltd., Credit Suisse Group AG and Goldman Sachs Group Inc. also cut coal-price estimates in the past several weeks.

 

STORY: Inflation Isn't Too High; It's Too Low

“It’s a trade-off between making small losses in the current market of somewhere between $5 and $10 a ton and maybe larger losses if they shut completely,” said Mark Pervan, the Melbourne-based head of commodity research at Australia & New Zealand Banking Group Ltd. “There is a lot of high-cost capacity in Australia not prepared to shut down and that’s prolonging the return to recovery.”

 

Price Slide

 

Spot thermal coal at Newcastle port in Australia, an Asian benchmark, fell to $72.98 in March, the lowest since October 2009, data from globalCOAL, a London-based data provider, show. Prices for the fuel burned by power plants were at $73.80 in the week ended April 18, after averaging $85.27 last year. The cost of coking coal, used in steelmaking, has dropped 16 percent this year, according to Energy Publishing Inc.

 

Utilities in Japan agreed to an annual price of $81.80 last month, the cheapest supplies from Australia in five years. About 13 percent of global thermal-coal exports are unprofitable at that level, compared with 25 percent at $73 in the spot market, according to Morgan Stanley. Asian steelmakers are paying a record low for a quarter’s supply of hard coking coal.

 

STORY: Putin Could Stop Selling Gas to Ukraine. Here's Why He Won't

“For thermal, there is no obvious short-term catalyst to see prices higher,” said Daniel Morgan, a Sydney-based analyst at UBS who estimates $70 may be the tipping point at which mining companies’ losses on sales exceed those on freight deals. “It’s not a demand problem, just lots of supply.”

 

Freight Fees

 

The freight agreements, known as take-or-pay contracts, helped finance at least A$6.1 billion ($5.7 billion) in port and rail developments on the east coast during the past seven years as producers sought to increase supply to Asia. The Wiggins Island export facility in Queensland and a third terminal at Newcastle have been funded under the deals.

 

The long-term freight contracts were spurred by the need to ensure volumes for infrastructure investments that can last a quarter century, according to Aurizon Holdings Ltd. (AZJ), Australia’s largest hauler of coal. The agreements helped attract funding, the Brisbane-based company wrote in an e-mail April 15.

 

STORY: Pimco's Bill Gross Picks Up the Pieces

The take-or-pay agreements are hindering unprofitable mines from cutting output, Goldman Sachs analysts said in a March 30 report. Long-term supply contracts are also shielding some mines from the slump in spot prices, the analysts said.

 

China Imports

 

Prices may rebound after dropping to a level that makes it cheaper for China to import than buy domestic output, according to Goldman Sachs. Prices are “unsustainable” and will likely return to levels sufficient to cover some of the highest mining costs by the end of the year, the bank says.

 

Some miners are starting to reduce supply. Glencore Xstrata Plc, based in Baar, Switzerland, said last month it would stop production from its Ravensworth mine in Australia. Walter Energy Inc., based in Birmingham, Alabama, said last week it will immediately idle output at its Wolverine mine in and suspend its Brule project by July. Both are in Canada.

 

Source: http://www.businessweek.com/