Coal Market Warming Up – Mining executives and analysts are turning bullish on coal as demand looks set to outpace supply

September 1, 2014, 10:27 am | Admin

For two years, the world’s coal miners have been plagued by a glut that has battered prices and led to the closure of mines, straining tiny towns from Australia to South Africa. Now, some of the largest coal exporters are signaling the worst may be over as prices stabilize.

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 predicting 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% of global needs, according to the International Energy Agency. 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 Australia’s Whitehaven Coal Ltd., 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,“ he says. “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 have 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% since the start of July, while shares of Indonesian producer PT Adaro Energy Tbk have gained 12%, and Glencore PLC’s stock has increased 11%. Supply rose more quickly than demand over the past couple of years, as mines that were planned when the market was booming began production. Glencore says thermal coal shipped by sea rose 22% between 2011 and 2013, outpacing an 18% rise in demand.

As a result, the price of thermal coal, which is used to generate electricity, has been trading near its lowest level in five years. Metallur gical coal, which is used to make steel, is near its lowest point in seven years.

That has hit the balance sheets of mining companies–even diversified ones. BHP Billiton, the world’s largest miner, says weaker coal prices wiped $1.5 billion off its underlying earnings for its last fiscal year.

Some miners have closed their most expensive pits, contributing to more than 10,000 jobs cut in Australia’s coal sector. Populations have shrunk and housing markets have crashed as workers were laid off in towns that rely on coal mining, such as remote Moranbah in Queensland.

But the world’s biggest shipper of thermal coal, Glencore, expects demand for that fuel to start outpacing supply again starting next year, shoring up prices. “They seem to have bottomed, stabilized, [and] improved a little bit in recent periods,“ Glencore Chief Financial Officer Steven Kalmin toldin August.

Analysts expect a rise in Indian thermal-coal imports–after lowerthan-usual monsoon rains led to weaker hydropower generation–to send prices higher. Citi analyst Ivan Szpakowski forecasts a lift in Chinese industrial activity toward year-end.

Buyers in China and elsewhere are also looking to switch to higher-quality coal that generates lower emissions.

A recent decision by India’s Supreme Court that all coal-mining licenses distributed since 1993 are illegal has been another jolt for the market, raising uncertainty over supplies that could prove a positive catalyst for prices, says Whitehaven’s Mr.Flynn. The court didn’t cancel the roughly 200 mining licenses granted during that period and is to decide Monday what will happen to them.

Even with all its mines in operation, India is a big buyer of foreign coal.

Citi’s Mr. Szpakowski says 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 was likely to fall in the coming months.

Source: AWSJ September 1, 2014

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