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Commodities
Falling oil prices aid coal miners
From the Financial Times of Mon, 15 Dec 2014 18:28:06 GMT

Falling oil prices and weakness in commodity currencies will provide a boost for struggling coal miners, according to the International Energy Agency, which expects global demand for the fuel to slow over the next five years.

The price of coal has continued to fall this year as demand has weakened and producers in Australia and Indonesia have increased output in an effort to push down unit costs.

Benchmark Australian thermal coal, which is used in power generation, has fallen 25 per cent to $61 a tonne, while metallurgical coal, a steelmaking ingredient, is down by more than 16 per cent.

Falling prices have raised hopes that struggling high cost operators would be forced to close unprofitable mines, reducing supplies and helping to balance the market. In a recent presentation Glencore estimated a quarter of the world’s seaborne thermal coal market was lossmaking.

But the IEA says the “price floor” provided by production costs had decreased significantly this year, in part due to external factors, helping miners withstand further ”economic pain”.

“The depreciation of local commodities in the main exporting countries has been significant and low oil prices also help, as oil represents a significant share of coal costs, especially in open pit operations,” said Keisuke Sadamori, director energy markets and security at the IEA.

Mr Sadamori was speaking at the release of the IEA’s medium term coal report. The Paris-based agency expects demand growth for coal will slow over the next five years as China, the biggest consumer of the fuel, takes steps to moderate its consumption.

It sees global demand growth for coal of 2.1 per cent a year until 2019, a slowdown from the annual growth rate of 3.3 per cent recorded between 2010 and 2013.

After two years of cost cutting and efficiency gains, many analysts assumed miners had run out ways to improve their competitive position in the market place. But the weakness of commodity currencies and oil prices has thrown them a lifeline and will lead to a further downward shift in the global “cost curve”, said Stefan Ljubisavljevic, analyst at Macquarie.

“People thought there wasn’t much more to go for, but that was before the oil price collapse,” said Mr Ljubisavljevic, who noted that Glencore, the world’s biggest supplier of seaborne thermal coal, revised its forecasts for the market last week.

In an investor presentation, Glencore forecast a balanced thermal market in 2015, as opposed to a 30m tonne deficit predicted by the group in September. It also sees a deficit of about 30m tonnes in 2016 and 50m in 2017, against previous forecasts of 50m and 80m tonnes.

In the seaborne thermal coal market, the IEA believes trade will grow 3.2 per cent a year until 2019, with India surpassing China as the biggest importer in five years.

“This development is primarily caused by a strong increase in thermal coal demand and domestic coal production that cannot keep pace,” the IEA said its report.

Laszlo Varro, the head of the gas, coal and power division of the IEA, said falling oil prices could hit demand for coal in Europe by making gas cheaper. If prices are low enough, gas can compete with coal in power generation.

Mr Varro said long term Russian gas contracts would fall next year because of their indexation to oil prices. “Typically they use a nine month moving average which means with oil prices starting to fall seriously from September [2014], Russian gas becomes really cheap [next year],” he said.

Mr Varro said liquefied natural gas [LNG] that had previously been re-exported from Europe would also remain in the region because of lower oil prices.

“Over the past three years Europe has been a net exporter of LNG . . . because it was profitable to ship the gas to Asia. But now Asian LNG prices [which are oil linked] have declined,” he said. “The LNG will stay in Europe and compete with coal,” he said.



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