Coal miners confident on recovery

For two years, the world’s coal miners have been plagued by a glut of the fuel that has battered prices and led to the closure of mines, straining tiny towns from Australia to South Africa reliant on their operations.

Now, some of the largest shippers are signaling the worst may be over as prices stabilise.

Coal mining executives say a string of pit shutdowns should finally kick-start the market by curbing supply, while demand from buyers such as China and India appears to be picking up. The optimism is a reversal from past months when companies warned of a sustained market surplus, although they are stopping short of tipping a sharp rebound and see any recovery as gradual.

Coal is one of the world’s most important energy products and is the biggest source of electricity generation, supplying about 40 per cent of global needs, the International Energy Agency says. For a country like Australia, which counts coal as its second largest export after iron ore, coal is an important source of jobs and revenue.

Paul Flynn, chief executive of Whitehaven Coal, says he has turned more upbeat on the market’s prospects in recent months. The company, which sells coal to countries such as Japan, China and India, reported a second annual loss last week as low prices hurt revenue, but Mr Flynn says he sees the potential for a return to profitability in the year ahead.

“We certainly feel better about the prospects for coal,” Mr Flynn told The Wall Street Journal. “It’s been a very, very difficult environment, but I see signs that the oversupply situation is tightening up now, which is good.”

While spot prices are yet to enjoy much of a lift, having largely flattened over the past month, miners are benefiting from the renewed enthusiasm. Whitehaven shares have rallied 37 per cent since the start of July, while Indonesian producer PT Adaro Energy is up 12 per cent.

Supply rose more quickly than demand over the past couple of years, as mines that were planned when the market was booming moved into production. Glencore says thermal coal shipped by sea rose 22 per cent between 2011 and 2013, outpacing demand, which rose 18 per cent.

As a result, the price of thermal coal, which is used to generate electricity, has been trading near its lowest level in five years. Metallurgical coal, a steelmaking ingredient, is near its lowest in seven.

This has hit the balance sheets, even of diversified miners. BHP Billiton, the world’s largest miner, said weaker coal prices wiped $US1.5 billion ($1.6bn) off its underlying earnings last fiscal year.

Some miners have closed their most expensive pits, contributing to more than 10,000 jobs cut in Australia’s coal sector. Towns that rely on coal mining for employment and spending, such as remote Moranbah in Queensland, have seen their populations shrink and housing markets crash as workers were laid off.

But the world’s biggest shipper of thermal coal, Glencore, expects demand for that fuel to start outpacing supply again from 2015, shoring up prices. “They seem to have bottomed, stabilised, [and] improved a little bit in recent periods,” Glencore Chief Financial Officer Steven Kalmin said in a presentation to investors in August.

Analysts expect a rise in Indian thermal coal imports — after lower-than-usual monsoon rains led to weaker hydropower generation — to send prices higher. Citi analyst Ivan Szpakowski also forecasts a lift in Chinese industrial activity toward the end of the year, which he thinks will drive up demand.

Buyers in China and elsewhere are also looking to switch to higher-quality coal that generates lower emissions and meets environmental targets. This is a plus for Australia with its abundant reserves of high grade coal. In contrast, miners with low quality reserves or high costs could face continued challenges and be forced to cut output further, analysts say.

Production cutbacks could spark a recovery in metallurgical coal. Whitehaven estimates 20 million tonnes of output has been cut in the past few months alone.

Another jolt for the market has been a decision by India’s Supreme Court in August to rule all coal-mining licenses distributed since 1993 illegal, raising uncertainty over supplies that could prove a positive catalyst for prices, Mr Flynn said.

Even with all its mines in operation, India is a big buyer of foreign coal because of rising power-generation demands.

“There is an urgent need in India to add significant capacity generation in a short time frame. This generation will largely be coal-based,” Anil Sardana, managing director of Tata Power, one of India’s largest integrated power companies, said.

Citi’s Mr Szpakowski said he recently told clients to buy Australian thermal coal futures as Indian imports were poised to increase, Chinese demand was going to rise and supply would fall in the coming months.


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