Thermal Coal Price Forecast 2015

The thermal coal price has been on a downward trend in recent years, and the thermal coal price forecast isn’t set to get rosier anytime soon.
A recent article from The Sydney Morning Herald notes that thermal coal is “selling at an eight-year low of $US58.04 a tonne, down from $US66.90 a tonne at the start of 2015.”
However, an October 5 article from Platts quotes Citi analysts as stating that the thermal coal price forecast may not be quite as bad as many think. The firm sees the price drop slowing as it believes that producers will not be able to cut costs much further.
“While [mine production] costs are expected to continue to fall, this process is likely to slow as the biggest gains from productivity, oil and foreign exchange have already been achieved,” Citi analysts said.
Here are a few more thoughts on the subject from Wood Mackenzie’s Joe Aldina, who gave a presentation that touched on metallurgical and thermal coal price forecasts at this year’s Coal Association of Canada conference.

Market still in oversupply

Aldina explained that both the thermal and metallurgical coal markets are still in oversupply. In particular, he noted that Australia has been putting a good amount of thermal coal into the market, “affecting the seaborne trade,” while China has pulled back in terms of demand.
While he “blamed Indonesia” for oversupply in the thermal coal market in 2014, falling margins for thermal coal producers have “really hit Indonesia” hard in 2015. “I guess they get a pass this year,” he said. “It’s largely Australia whose volumes have held up … that’s really keeping the oversupply in the market.”
There are other factors contributing to the exacerbation of oversupply as well.
“Really, the big impact has been the oil price fall because it’s allowing producers to bring costs down,” Aldina said. “And then the ruble collapse has allowed some Russian material to flow into the market on both the thermal and the met coal side in terms of PCI coal.”
However, he suggested that the flow of Russian coal into the market will slow “given the cost pressures on Russian coal and rising domestic prices.”
“Thermal coal is in a similar situation [to coking coal] where the market is not quite in balance yet. It’s been driven by FX changes on the cost side. It’s been driven by China pulling back from the China seaborne trade by more than 50 million tonnes, we think, year-over-year,” he said. “India’s importing a positive 20 million additional tonnes, but again, we think this market for thermal coal has contracted maybe somewhere on the order of 30 million tonnes.”
In other words, it’s been difficult for the coal price to break out as cuts in supply have been accompanied by pullbacks in demand.

What’s next?

As with metallurgical coal, for which Wood Mackenzie expects incremental price improvements, the firm sees hope on the horizon for the thermal coal price. While Aldina sees the market remaining in oversupply for the medium term, there are a few bright spots.
“We’re getting closer to equilibrium in the thermal coal markets,” he said. “We’re really constructive on India. We think that they may bring in close to 20 million tonnes of additional thermal coal this year.”
Aldina added that he believes there could be risk of India importing coal faster than anticipated, but that this will be a question of sorting out infrastructure challenges in the country. “But it is a bright spot,” he said.
He also stated that the firm has noticed significant cuts in terms of production in the thermal coal market. “We’re making some progress in terms of the supply overhang here in the thermal coal markets,” he said.
That said, Aldina stressed that a recovery isn’t on the doorstep just yet, stating that it will still take a few years for production to fall out of the market. “We firmly believe that these things are cyclical. We’re going to get a pickup,” he stated.
 
Securities Disclosure: I, Teresa Matich, hold no direct investment in any company mentioned in this article.