The slide in oil prices has raised speculation that oil companies in the U.S. could be forced to cut back on production, but a market slump in another commodity is also putting pressure on producers.
Coal markets are currently experiencing a supply glut that is showing no signs of recovery. Mining companies drew up plans for billion-dollar projects in the mid-2000s, when commodity prices were on the upswing. With many of those projects now coming online, coal production is rising.
BHP Billiton, an Australian mining giant, just opened a $3.4 billion mine in Queensland, which will add 5.5 million tonnes of coal capacity per year to the global market. The mine allowed BHP Billiton to push its production to record levels. Australian Prime Minister Tony Abbott was on hand for the ribbon-cutting ceremony, where he proclaimed “coal is good for humanity.”
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Whether or not that’s true, it’s clear that the markets are not being good to coal. BHP Billiton is adding a new “world class” mine, but other mines in Australia are shutting down or laying off workers because of low prices and weak demand. According to Reuters, a third of Australia’s mining sector is operating at a loss, choosing to keep operations going while waiting for sunnier days.
Coal mining companies may be digging out more coal than ever before, but demand is not keeping up with all of the new supply.
Much of that has to do with slowing demand in China. Third quarter figures showed that the Chinese economy expanded at a 7.3 percent annual rate, beating estimates, but still the slowest pace in five years. A slower economy, coupled with an aggressive campaign on behalf of the central government to cut air pollution, meant China’s coal consumption actually declined by 1 to 2 percent from January through September of this year.
China’s slowdown is cyclical, implying that coal consumption could once again climb if the economy improves. On the other hand, China implemented a series of tariffs on imported coal in an effort to prop up its own coal producers, which are also struggling.
Metallurgical coal, used in steelmaking, faces a 3 percent levy, while the tariff for thermal coal, which is burned for electricity, will be 6 percent. China sources around 39 percent of its coal imports from Australia, but the tariff threatens to slash that amount. Other major sources, such as Indonesia, will be exempt from the tariff due to its free-trade agreement with China. Share prices for Australian coal companies plummeted after the announcement.
Intriguingly however, the Chinese government has more recently hinted that coal tariffs would be waived if Australia and China complete a free trade agreement. No doubt the move will enhance China’s leverage during the negotiations.
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But until a free-trade agreement is reached, the glut of Australian coal capacity is adding to an already oversupplied market.
Consequently, prices for both metallurgical and thermal coal are at multi-year lows.
And that is reverberating back to the United States. Coal companies are being ravaged by low prices. Coal exports from the United States dropped by 16 percent in the first half of 2014, compared to a year earlier. Peabody Energy (NYSE: BTU), the largest coal producer in the United States, reported another quarterly loss on Oct. 20, and its share price has been slashed in half since the beginning of the year.
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Until high-cost mines are shuttered, which would reduce the market glut, coal companies are going to have a tough time.
By Nick Cunningham of Oilprice.com
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