Coal prices set to stay low until mines close, supply drops

COAL prices will remain in a rut until more mines are closed to address the supply overhang that has weighed on the market for more than three years.

Demand for coal has not kept pace with production after high prices in 2008 triggered a boom of investment in new mining capacity, which in turn sent prices to multiyear lows.

Colin Hamilton, the head of commodities research at Macquarie, said supply had been “extremely stubborn” in responding to the low prices.

Speaking on the sidelines of the Coaltrans world coal confer- ence, Hamilton forecast that prices for cargoes from South Africa’s Richards Bay terminal could fall as much as 20 percent to about $40 (R530) a ton in the coming six months.

Weakening currencies in coal producing countries have shielded producers from falling prices to some extent, helping to sustain output.

“Outside of oil price pressure you would need to see a lot of closure of production capacity but that’s effectively saying we’ll have higher prices and a smaller market,” said Trevor Sikorski, an analyst at consultancy Energy Aspects.

Top importers have dealt another blow with a dramatic slowdown in shipments to China this year, and a flattening of volumes going to India, as both countries refocused on their domestic output.

At the same time environmental concerns have driven some governments to introduce policies penalising coal power production, such as Britain’s carbon tax, which charges power producers for each ton of carbon dioxide they emit.

Europe, the world’s fourthlargest importer, is a market in decline as power generators switch to gas.

“The outlook for coal in Europe is bad, the combination of higher carbon prices and lower gas prices starts to spell the end of coal as a base-load fuel in European power,” said Energy Aspects’ Sikorski.

Mercuria Energy Trading director of dry bulk analysis Fabio Gabrieli forecast total European imports, excluding Turkey, could fall below 100 million tons in the next five years, from a peak of about 150 million tons in 2013. – Reuters