12
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World Coal
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March 2016
Industry View
Industry View
T
he coal sector is in intensive care.
But what is the prognosis? I defer
to the trader’s familiar adage: low prices
are the cure for low prices. Low prices
will force the supply curve to drop below
the demand curve. Higher prices will
be needed to rebalance the scale. Below
are just a few of the drivers that I believe
will collectively support the coal sector’s
rebound.
China:
China announced its intent to
close up to 150 million t of steel production,
70 million t of coke production and
unquantified coal production (‘large scale’).
Unlike prior announcements that were
mostly disregarded in the provinces, this
one comes with funds to mitigate the social
impact on as many as one million impacted
workers. Bottom line: fewer steel and coke
exports and more room for coal imports,
which China requires to keep its domestic
coal market in check.
Coal supply and depletion:
The global
project pipeline has been bone dry for a
couple of years. Meanwhile, existing
operations are gradually depleting their
dedicated reserves. There have been
numerous cutbacks, voluntary closures and
involuntary closures. The US has been
leading the pack, but the closures in
Australia, Canada, China, Germany,
Indonesia, New Zealand, SouthAfrica and
the UK have been meaningful. During this
period, minor exporting countries, such as
Vietnam, have turned into net importers
and the major future exporters, such as
Mongolia, have failed to materialise. When
the demand curve crosses the supply curve,
the response time will be longer than any
time in recent memory.
Weather events:
We’re coming off a
strong El Niño (dry), which could very well
flip into a La Niña (wet). It has been more
than five years since the last Big Wet in
Australia, whose market share is greater
than it was back then, while its
volume-driven cost reduction strategy
means its supply chain is running close to
capacity. Any weather ‘glitch’ could easily
snowball into a major shortage.
Global coal demand:
Intact with the
following caveats:
1.
China’s demand for imports rebounds
to a level required to keep its domestic
coal prices in check.
2.
China follows through on steel and
coke closures, obviating the need to
dump into the seaborne market.
3.
India remains unable to rely on its
low-quality coal reserves to supply its
total demand.
4.
Rest of Asia continues on track with
its strategy to electrify using coal-fired
generation.
US as a swing supplier:
The US coal
sector has declined dramatically – from
900 million t in 2014 to 650 million t in 2016
(with further cutbacks to come). The
surviving industry has never been more
competitive and comprises mostly large
opencast mines or highly-mechanised
longwall operations. US coal exports will be
48 million t in 2016 (vs 112 million t in 2012).
Theoretically, the US can still serve as a
swing supplier to the seaborne market, but
global buyers will have to bid against
domestic utilities. As US demand for
natural gas from the industrial, export and
transportation sectors push natgas prices
higher, US coal plants could recapture some
of their lost market share. The seaborne
market could find itself in an interesting
bidding war for limited coal supply.
Crude oil:
Welcome to coal’s painful
world! Crude oil in the US$30s is
unsustainable, but in the interim it serves as
a nice boost to the global economy. More
than two trillion dollars are shifting
annually into the wallets of the consuming
countries. The oil exporting countries will
still spend, albeit not as much, by drawing
down their reserves and/or leaning on
creditors to bridge their fiscal gaps.
Foreign exchange:
The depreciation of
non-US-dollar currencies has flattened.
Further US-dollar-denominated price
declines will encourage more cutbacks in
non-US production.
Global economy:
The trend is your
friend. Economic cycles notwithstanding,
we have experienced global economic
growth since the dawn of the industrial
revolution. The world comprises about
1.3 billion ‘haves’ and 6 billion ‘have nots’.
The urbanisation and electrification
necessary to change this mix for the better
will require more coal, more cement and
more steel.
Climate change policy:
The climate
change winds are shifting. Rampant
data-manipulation signals desperation
about this ‘settled science’. The wealthier
economies are suffering from their
unsustainably expensive renewable energy
mandates that have had minimal impact on
global CO
2
concentrations. The climate
change policymakers in the wealthy
countries might continue to ‘talk the talk’,
but the rest of the world is not ‘walking the
walk’.
In conclusion, the coal sector plays a
critical role in the global economy and
requires much higher prices to sustainably
supply long-term demand. Commodity
markets typically soar like a rocket and fall
like a feather. Arebound is inevitable. The
unanswerable question is: how imminent? I
expect a volatile rocket to appear within the
next two years.
Read the full article: bit.ly/doyleWCL
About the author
Steve Doyle has over 30 yr of experience in the
coal trading business, founding Doyle Trading
Consultants in 2002. He is now President of
BtuBarron LLC.
MAKIN
G A CASE FOR THE COAL SECTOR’S REBOUND
Steve Doyle, BtuBarron LLC
