(Repeats story first published late on Tuesday; no change to
* Bankruptcies, project stoppages hit industry globally
* Further price slide possible as U.S. exports soar
* Costs exceed selling price as some currencies rally
By Jacqueline Cowhig
LONDON, July 24 Global coal output is set to
shrink over the next year or two as miners grapple with a
combination of low prices driven by cheaper alternatives, weak
demand, and cost and currency headwinds.
Output has already begun to fall, but so far only by a
couple of millions of tonnes - a tiny fraction of the global
annual seaborne coal trade of 750 million. Analysts and industry
executives say cuts could soon reach dozens of millions of
tonnes to bring supply in line with weaker demand in China and
The United States is already cutting due to low prices and
competition with cheap shale gas, while high-cost Russian and
Australian miners are also trimming production, and even
lower-cost rivals could follow suit due to high labour costs and
strong local currencies.
It could take a couple of years for the market to find a
balance, prolonging a period of painfully low profits for
higher-cost miners while helping out utilities, steel firms and
cement makers with low input prices.
"The current oversupply predicates production cutbacks and
the delay or cancellation of expansion plans," Bank of America
Merrill Lynch said this month. "Although we expect the surplus
to shrink in 2013, it will not disappear," it added.
Coal, particularly thermal coal for power generation, is the
second biggest dry bulk commodity market in the world by trade
volumes, but its illiquid spot market is prone to price booms
Prices peaked at over $200 a tonne before the 2008 financial
crisis, then fell sharply with other commodities before
stabilising for the next few years at around $100-$125 due to
booming Chinese demand.
During the latter period, miners almost everywhere in the
world ramped up coal output on the assumption that China and to
a lesser extent India would absorb it all without depressing
prices, but they hadn't reckoned on booming U.S. shale gas
production and a slowing of Chinese demand.
"In thermal coal the most important development has been the
rise in U.S. exports and the re-direction of previous coal
exports to other markets due to U.S. shale gas production," said
Evy Hambro, managing director at BlackRock, the world's largest
"U.S. mines are seeing a closure of capacity or going into
bankruptcy protection," he added.
PRODUCING BELOW COST
U.S. domestic coal prices have fallen much faster and more
steeply than global prices, according to Reuters data. U.S.
miner Patriot Coal filed for Chapter 11 bankruptcy protection
China produces half the global annual coal output of 4
billion tonnes and also imports large volumes from Australia,
Indonesia, South Africa, Russia and Columbia. The United States
produces 550 million a year and has also emerged as a big
exporter because of the shale gas boom.
Outside the United States, coal prices have stabilised at
around $85 per tonne since May, but the real problem is that
this price is already below cost for some producers.
"If prices stay at $85, then much more coal will have to
fall out. In the next couple of months, I think you will see
15-20 million tonnes will have to drop globally," an Indonesian
Global major Rio Tinto said last week it was
cutting jobs at its Australian Clermont thermal coal mine, while
exporters said Russia is likely to lose 6-8 million tonnes of
thermal coal exports in 2012 due to production cuts begun in the
Miners usually try to ride out periods of depressed prices
without cutting output until they have no other choice because
cuts inflate their costs per tonne, but this time the market
feels prices might slide further if deeper cuts are not made.
"For example, Russian miners are looking at stopping
expansions and trimming capex spending; they're focused on
upgrading and washing their output to increase margins on sales
because they can't do anything about the rail costs," said Rudi
Vann, coal analyst with Wood Mackenzie consultancy.
Costs in most exporting countries have soared in recent
years. Russia has historically been the highest-cost coal
exporter by a substantial margin because of the thousands of
kilometres coal must travel by rail from Siberian mines to
But some U.S. and Australian miners now also have cash costs
matching Russia's of up to $100 a tonne at port while facing a
spot coal price of less than $90 including shipping costs.
"Labour inflation is severely impacting the Australian
industry both in operating and capital costs," said Vann.
Large miners in South Africa and Indonesia seem best placed,
with the lowest costs at $30-$50 per tonne.
Hambro from BlackRock said another negative factor was the
relative strength of currencies in producing countries.
Russia and South Africa have recently seen some weakening of
the rouble and rand in a move that might help exporters, but
steep rallies in the Australian dollar and Colombian peso
since 2008 have made life very difficult for exporters in
those countries as they sell coal in U.S. dollars but face
soaring costs in local currencies.
"The movement of the exchange rate is an atomic bomb for
producers," said a coking coal trader from Colombia, where costs
have come dangerously close to export prices.
As of Tuesday, Colombia's peso has firmed about 9 percent
against the dollar so far this year, making it one of the
strongest gaining currencies in the world.
(Reporting by Jacqueline Cowhig; additional reporting by Jack
Kimball, Editing by Dmitry Zhdannikov and Will Waterman)