A look into the future: coal

Coal, mined in every Australian state as well as in the Northern Territory, is the country’s largest commodity export and a key national resource. However, with the fallout from the global economic crisis beginning to bite both domestically and in Australia’s key coal export markets, experts are united in their view that the next 12 months will see a turbulent time for coal prices and for the industry in general.
Indications are that 2009-2010 will see mixed fortunes for various coal types. “I think demand for thermal coal will hold up very well,” said Gavin Wendt, head of mining and resources research at stock market research house Fat Prophets. “However, all of the recent evidence from Australia’s two major steel-makers, Bluescope and OneSteel, is that production will fall, hence metallurgical coal demand has to be impacted.”
Wendt told The Australian Journal of Mining that the price of metallurgical coal will also be hit by faltering demand abroad as construction slows. He continued, “I don’t think we’ll see that much demand strength for metallurgical coal in any market, even China and India.”
This is a view shared by energy, metals and mining industry consultants Wood Mackenzie. A company spokesperson pointed out that all major Australian coking and PCI coking coal players have announced reduced plans for 2009 production as well as substantial workforce reductions. The firm predicts that Australian metallurgical coal export volumes will be reduced by around 15 million tonnes over the coming year.
Predictions for thermal coal are more positive. Lower demand from Japan is expected to mean thermal coal sold by contract this year will fetch considerably less than during the last Japanese Fiscal Year (JFY). Wood Mackenzie’s spokesperson continued, “Our revised assumptions for contract export prices for the JFY are US$140 dollars per tonne of top quality hard coking coal and US$75 for thermal.” He added, “While these are considerably lower than record prices of 2008, Australian dollar revenues for local exporters will be insulated to a degree by the recent strong depreciation in the Australian dollar.”
Reduced returns from sales to Japan will also be offset somewhat by increased demand from elsewhere in Asia. According to the latest commodities report from the Australian Bureau of Agricultural and Resource Economics (ABARE), “India is projected to exhibit strong growth in thermal coal import demand over the medium term, increasing from an estimated 34 million tonnes in 2008 to 80 million tonnes in 2014.” The report continues, “Underpinning this increase is the Indian Government’s plans to double coal-fired electricity generation capacity by 2017 from an operational capacity of 76,229 megawatts in June 2008.”
Thermal coal sales increased 23 per cent to 659,000 tonnes in the last six months of 2008 compared to the same period of 2007, while coking coal sales sank 28 per cent to 262,000 tonnes. Demand is such that some mining companies are looking at selling stockpiles of semi-soft coking coal and pulverised coal injection (PCI) coal to power utilities as thermal coal. “Companies like Macarthur Coal and Felix Resources are two companies that will be selling more of their coal as met coal,” revealed Fat Prophet’s Wendt.
Many believe that a comparative decline in throughput is providing the ideal opportunity for coal mining companies to step up the rate of infrastructure improvements and cut production costs. “Now is the time for Australian coal producers to get their houses in order so they can set themselves up for the medium term upswing,” argues Deloitte mining and manufacturing partner Tim Riordan. “We’ve seen metallurgical coal go from around $300 to $100 per tonne in the last couple of months. But it was only a year ago that it went up from $100 to 300 – and at that time $100 was a record price.” However, while prices were tripling costs for many producers doubled. “They have been so focused on production they have been left holding the cost baby.”
Riordan believes that the downturn may also force a Government re-think on the coal industry. He points out, “Another implication down the track is that new mine projects will need to be subject to much tighter governance and control. The practices of recent years where projects have been allowed to blow out in time and cost cannot be tolerated in the current pricing regime.”
Fluctuating demand, prices, production and profit margins appear to have triggered a number of takeover bids among the Australian coal industry’s main companies. One of the biggest recent developments was Gloucester Coal’s proposed $A900 million merger with Whitehaven Coal. However, the move came under threat in February when commodities trader Noble Group launched a competing $310 million takeover bid of Gloucester.
The prospects for Australia’s coal industry are positive – especially when set against the downward traffic in other worldwide industries – and commodity prices over the next 12 months are expected to reflect this. According to Wood Mackenzie, “there are still healthy cash margins available for the large majority of Australian coal miners especially relative to historic long-term averages.”

From: Australian Commodities - March quarter 09
Global steel production to fall in 2009…
Falling steel demand is expected to lead to a contraction in global steel production of around 6 per cent in 2009. Steel production in the United States, Japan and European Union is forecast to decline sharply by 15 per cent, 18 per cent and 10 per cent respectively. Steel production in developing countries such as China and India, which have underpinned world steel output growth over the past few years, is forecast to grow relatively slowly in 2009 at 3 per cent and 4 per cent respectively.
…but recover relatively quickly
Following recessions in the 1980s and 1990s, global steel production took eight to nine years to recover to pre-recession levels. However, it is expected global steel production will experience a relatively quick recovery from the current recession.
China is expected to underpin this quick recovery. Contributing to a rapid recovery in China’s steel production growth will be aggressive Government action to stimulate the Chinese economy. This includes the US$586 billion stimulus package announced in November and significantly reduced interest rates. It is likely the Chinese Government will announce additional stimulus measures and reduce interest rates further to support economic growth in the short term. The downside risk to this forecast is global economic growth could take longer to recover than currently assumed.
Over the medium term, strong growth in Chinese steel consumption and the low cost nature of producing steel in China should encourage ongoing investment in Chinese steel production. Over the five years to 2014, Chinese steel production is projected to grow by an annual average of 7 per cent a year to 770 million tonnes. Steel production in India, the Russian Federation and Brazil is also expected to recover strongly because of assumed strong economic growth in these countries and demographics which are favourable for long-term growth in steel production and consumption.
On the other hand, steel production in the United States, European Union and Japan is projected to recover at a much slower rate. Increased steel production and exports from emerging economies are expected to replace less efficient steel producers in the developed world.