Coal must fall: high price will slash demand
Supply pressure set to ratchet up next year
THE global coal market continues to reap the benefits of China’s decision to cut coal production to reduce pollution and achieve the zero emissions target it agreed to in 2014.
Despite China relaxing its restrictions on mining coal in the second half of this year, the coal price has remained high.
This year, share prices of coal mining companies have gained more than 100% due to the fourfold increase in the price of coal In June last year the global coal price was $86.40 a ton and this month it peaked at $307 a ton on the Premium Hard Coking Coal Index.
In 2014, China agreed in a deal with the US to cap emissions by 2030. According to a White House statement at the time, the two countries accounted for more than a third of global greenhouse gases.
But XMP Consulting coal analyst Xavier Prévost said current coal prices were “just a little blip in the long trajectory of falling global prices”.
If the high price of coal persisted, sales would slump.
“The latest forecast for the Richards Bay Coal Terminal hub gives a decrease from January to December 2017 to the levels of April 2016,” he said.
Anglo American, which has embarked on an asset-sales programme — which includes its coal interests — to put the company back on track, has come under fire for slowing down the programme to take advantage of the turnaround in commodity prices. The company is targeting $3-billion (about R43-billion) to $4-billion from asset sales this year.
On Tuesday Bloomberg reported that Anglo’s board had rejected a bid from Apollo Global Management and Xcoal Energy & Resources for its Australian metallurgical coal assets. This was because the offer for the Moranbah and Grosvenor mines in Queensland was reportedly too low in light of the recent rise in coal prices.
Earlier this year Anglo sold its Brazilian niobium and phosphates business for $1.5-billion. It also sold its Foxleigh, Callide and Dartbrook mines in Australia. The company’s share price has risen 218% since January.
At the beginning of the year, Exxaro — one of the biggest coal producers in South Africa — said it was hoping to export about 15 million tons of coal to India in a bid to attract a broader client base, reduce its dependence on demand from Eskom and mitigate the low commodity prices which hit mining companies around the world in the second half of last year.
The company said the Indian government preferred the quality of coal produced in South Africa.
Prévost said India was burning more coal in a bid to boost industry and was importing about 55.7% of South Africa’s production.
However, although India would like to buy more coal from South Africa, cheaper coal is available from Australia and Indonesia.
“We’re getting no sales, our stocks in Richards Bay remain up and we are shipping one or two shipments a week, which is very low because of the price,” Prévost said.
“If the coal price goes down a bit — at a reasonable price where we are still making a profit — that’s amenable to the Indians. Right now, coal sales from Richards Bay go out in discounts — they are not at the index price.”
Exxaro’s share price has risen 158% this year. Shares in South32 — which increased its production of energy coal in South Africa 2% in its third quarter and lifted domestic sales 9% — was up 149%.
Optimum Coal Mine, which was placed in business rescue under its previous owner, Glencore, because of the low commodity prices, got out of business rescue in August under its new owner, Tegeta Resources, a Gupta-linked company.
The public protector’s State of Capture report was highly critical of the sale of Optimum to Tegeta and Eskom’s role in the deal.
The report states: “It appears that the conduct of the Eskom board was solely to the benefit of Tegeta in awarding contracts to them and, in doing so, [Eskom] funded the purchase of Optimum Coal Holdings.” The deal “amounted to fraud”, it says.
In the wake of the negative publicity, Tegeta has requested that it be released from its contracts to supply Eskom.
Prévost said it was likely that Tegeta wanted to sell the mine and its allocation at the Richards Bay Coal Terminal as soon as possible to “make a bit of money and invest it elsewhere”.
On Tuesday, China’s biggest coal companies, Shenhua and China National Coal, sealed deals with state-owned power utilities in China to meet their coal demands and limit the rise in coal prices.
However, according to a Macquarie analysts’ report following the relaxation of controls on coal production in China, even if the move boosted coal production, it would “not fill the entire supply gap”.
As a result, Macquarie increased its price forecast for hard coking coal and thermal coal for the next two quarters, but said the market would remain bearish because it was likely supply would start to put pressure on coal prices only next year.
But for the world’s largest coal company, Peabody, which filed for bankruptcy early this year due to the drastic drop in commodity prices last year, it appears the race is run.
Prévost said the environmental policies of US President Barack Obama’s administration had contributed to its demise.
“If Trump manages to change the outlook for coal in the US, they might have a reprieve, but I think it’s too late.”
US president-elect Donald Trump championed the US coal industry during his election campaign.
The current coal price is a little blip in the long trajectory of falling global prices