Global Coal Investing in 2015: Another Tough Year

At the end of 2015, analysts were saying that a material recovery in coal prices was still a few years away.

That prediction still looks to be ringing true, as it was another tough year for both thermal and metallurgical coal prices. Prices for both types of coal have hit multi-year lows in 2015, and industry heavyweight BHP Billiton (NYSE:BHP,ASX:BHP,LSE:BLT) recently said that prices will continue to worsen before they get better.

That’s meant tough times for a number of larger coal producers in the US that have been forced to file for bankruptcy this year, including Alpha Natural Resources (OTCMKTS:ANRZQ), Walter Energy (OTCMKTS:WLTGQ) and Patriot Coal. Teck Resources (TSX:TCK.B,NYSE:TCK), on the other hand, has kept its head above water. Even so, that’s not to say it hasn’t also seen its share of hardship — the company posted roughly $1.5 billion in losses due to a writedown of its coal assets.

Still, there was a bit of excitement for coal investors following reports that billionaire George Soros was investing millions in the space. Yet with weaker demand from China and a lack of cuts on the supply side (Adani’s (NSE:ADANIENT) massive Carmichael mine also gained approval in Australia this year), most market watchers agree that it will still take some time for coal prices to recover.

To get a bit more insight into the coal market in 2015, the Investing News Network (INN) got in touch with Andy Roberts, research director for global thermal coal at Wood Mackenzie, and Jim Truman, the firm’s research director for global metallurgical coal. In the interview below, both analysts speak about the biggest news in the coal space this year, as well as what drove met and thermal coal prices.

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INN: What are your thoughts on the thermal coal and met coal markets last year?

WM: 2015 has been a difficult year for thermal coal producers. Prices are much lower now than at the beginning of the year and demand continues to weaken. Competition from alternative fuels is strong, whether it be from natural gas in North America, from policy-supported renewables in Europe or government mandates in Asia. Although the strong US dollar and lower diesel prices allowed producers some margin protection as prices fell, many of those producers making positive margins — and that certainly isn’t all of them — are experiencing razor-thin profitability. They are victims of their own success in lowering costs in the sense that those cost reductions are allowing them to make razor-thin margins and, by extension, avoid what we see as necessary production rationalization. The result has been intense competition for market at lower prices.

Australian producers dominate the seaborne metallurgical coal market, and with the weaker Australian dollar, have made gains even as the US-dollar-based benchmark has declined. The US, as a swing supplier to the met market, has begun to see some declines in exports and should be down by 10 to 12 million tonnes for 2015.

On the other hand, producers’ pain is consumers’ gain. Low coal prices translate to low power and product prices, and that supports competitiveness. Low power prices from coal also provide room for governments to liberalize power markets where they desire to do so. Low fuel prices support low product prices for commercial exporters and help them compete. But the pain felt by producers carries with it some worry for consumers as well. Counterparty financial stability is weakened on these thin to negative margins, and ultimately supply diversity could be threatened if these conditions continue long enough.

INN: Were your predictions for 2015 correct?

WM: We knew thermal and metallurgical coal demand would be weak in 2015 and that it was unlikely to rebound in the near term. We were also certain about the extent of supply overcapacity. The only question was where prices would settle. As it happens, they settled lower than we expected, primarily due to US dollar strength being greater than we thought. We underestimated cost reduction from the strong US dollar and low oil prices, and that led us to underestimate the ability of miners to compete at lower prices than we expected.

INN: Any surprises that affected thermal coal and met coal that the market wasn’t expecting?

WM: I think most participants have been surprised by the level of strength in the US dollar and how much that has been able to provide margin protection for miners. It does demonstrate just how interconnected, how converged the market has become. Markets still carry regional characteristics of course, but there are global factors that link them together and make them react in a fully coordinated manner. The exchange rate of currency is one such factor. Oil prices are another. Over time, gas prices will become as important in Asia as they are in both America.and Europe.

Also, Australian met coal mines were able to lower costs with additional adjustments — beyond currency and lower oil. The benchmark price is typically settled between Australian mines and the Japanese steel industry.(Source: Coal Invetsing News)