Coking Coal Costs Have Not Fallen In Line With Prices

Continued from Part One.

As we outlined the several structural changes in the (once-dominant) Australian coal industry that have made it less competitive, little wonder, then, that Australian coal miners are postponing or shelving new projects, and Rio Tinto and BHP Billiton (among others) have closed mines, including Blair Athol, Norwich Park and Gregory.

Wood Mackenzie estimates that 85 percent of Australian thermal coal projects are unviable at current spot prices, according to Reuters.

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Winter stocking in the Northern Hemisphere would normally boost demand and indeed, South Korea and China have both been building stocks, while Japan, deprived of nuclear, has seen demand this year from April to September increase 10.5 percent over 2011, according to this report.

Yet overall supply far exceeds demand and prices have continued to slide.

Coking coal prices have come off more in line with lower iron ore demand, but to the extent that low-grade US coking coal is substituted for semi-soft and pulverized coal injection for power production, this too has been dragged down by the thermal coal market.

Next year, the market is expected to be in better balance following mine closures and with a pick-up in demand.

HSBC is expecting average prices of $96/ton in 2013 on the back of solid medium-term demand from Asian utilities. Indeed, lower prices now will help support prices going forward as utilities give preference to cheaper high-grade imports over higher-cost, lower-grade domestic coal in China and India.

While coal demand globally is expected to be supported by solid Asian growth, the extent to which Australia can continue to dominate the trade remains uncertain — cost will increasingly constrain Australian producers and is starving new projects of financing.

Meanwhile, lower prices are reducing power generators’ costs at a time when selective support for power-hungry industries is much in demand.

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