Global Markets: Coal oversupply keeps pushing prices down

In 2014, coal oversupply persists and very low coal prices continued to dominate. For a few years, the focus of coal producers was to expand production. New capacity was constantly added and demand led by China consumed every additional tonne.

However, since 2011, oversupply and low prices have dominated. While US shale gas impacts on international coal prices have often been overstated, domestic Chinese dynamics translated into international markets have been largely overlooked. The domestic oversupply in China – accompanied by price reduction from the major producers to protect their market share – has strongly impacted international markets, which were likewise oversupplied by expansions by all major exporters.

Imported European steam coal prices, one of the main reference prices worldwide, were in the USD 70-80/tonne range during 2014, compared to over USD 120/tonne in March 2011. Australian met coal has been in a very narrow band between USD 112/tonne and USD 116/tonne since April 2014, compared to March 2011 when it averaged over USD 320/tonne.

Take-or-pay contracts, financial commitments and better economies of scale pushed prices down. With persistent low prices, the strategy of producers is to reduce costs. However, this is coupled with better efficiencies and economies of scale, putting more coal in the market, increasing oversupply and driving prices even lower. Another way to increase competitiveness is to cut production of unprofitable mines.

However, this is not always possible. Take-or-pay contracts for infrastructure use and financial commitments to pay investments make many producers operate with negative margins. Minimised loss is the new target for many, but in the medium term, despite low prices, expansions will happen. There are many projects in different phases of development ready to start or ramp up production, although most of them will not do so at current prices.(Source: IEA)