In the face of withering coal prices and a soft market, Glencore is still predicting long term viability for thermal coal.
In its sell-side analysts’ visit in regards to its coal operations last week, Glencore’s head of coal marketing and assets, Tor Peterson and Peter Freyberg respectively, outlined the current state of Glencore’s coal assets and its predictions for the market.
The miner outlined its current position as the top global exporter across its 22 operating coal mines, and in spite of recent government reports predicting pain ahead for coal, believed that “attractive long-term thermal coal market fundamentals remain in place based on economics and availability”.
However, it did fall in to line in regards to the oversupply issue.
In its September quarter report, The Bureau of Resources and Energy Economics (BREE) said global commodity supply had grown significantly over recent years, placing pressure on prices in the medium term.
It said producers will need to continue to focus on managing costs and improving their competitiveness in order to survive downturn in the price cycle.
Coal prices are expected to remain ‘subdued’ for the rest of 2014 as demand remains sluggish coupled with an abundance in supply.
BREE said some coal operations are unprofitable at this level, and said cost-cutting in the form of mine closures or production slowdowns would become common.
Contract prices are expected to decline by 6 per cent to settle at US$77 a tonne. From 2016, the market balance is expected to tighten as import demand continues to increase and lower prices during 2014–2015 reduce investment in new capacity and force less competitive operations to close.
The contract price is projected to rise to US$86 a tonne (in 2014 dollar terms) by 2019.
Exports are forecast to increase by one per cent to 196 million tonnes in 2014-15 reflecting moderate production growth. The value of these exports is forecast to decline by 9 per cent to $15.1 billion.
However Glencore predicted a slightly brighter future ahead for thermal coal, projecting a growth rate of around five per cent per annum on the back of planned slowing of global supply, adding that a “lack of ongoing investment is helping to rebalance the market”.
This view was espoused last month by fellow diversified miner Anglo American, as its CEO Mark Cutifani pointed to a steady reduction of supply globally from miners in an effort to induce a price recovery.
He explained that around 30 million tonnes of supply will need to be removed from the market to have an impact.
These statements were recently backed by AMP Capital senior economist Bob Cunneen, who stated at the recent HUG 2014 event that “there is more pain in coal ahead to ensure [the market remains] profitable”.
Glencore explained that much of this current oversupply issue is driven by Chinese economic growth and “even with lower growth rates [predicted] energy demand will grow significantly
With the proposals to dramatically slash coal consumption nationally China still needs energy and much of this energy will be produced by coal fired power station as demand, and industry, continues to grow.
According to the International Energy Agency coal will continue to dominate China’s energy mix to 2035 and the growth in coal demand in China through to 2020 actually exceeds the growth in the rest of the world combined.
However it stressed that “thermal coal is more than a China story”, pointing to the blooming of India as a new dominant market.
In July India, which is forecast to more than double its thermal coal imports by 2020, began running out of coal stock.
India already imports 20 per cent of its coal requirements and shipped in 152 million tonnes of coal last year.
However rising electricity demands are putting an increasing strain on local production, with state-run Coal India Limited (CIL) asked to up its output by importing more of the commodity to mix with domestic supply.
The demand for coal in India is expected to come in at 551.60 million mt in 2015, however supplies are predicted to amount to just 466.89 million mt, leaving an 84.71 million mt shortfall.
From 2010 to 2040, India’s net coal-fired electricity generation is expected to grow by a total of 910 terawatt hours, more than doubling from the 2010 total, while coal consumption for electricity generation will double.
Professor John Rolfe from CQUniversity said India would look to Australia for a reliable supply of high quality coal products.
Rolfe said this was particularly good news for coal miners in Queensland where a host of new multi-billion dollar mines were awaiting development approval in the Galilee Basin.
According to Glencore, this new market will allow it to grow its thermal coal output.
However the forecast for coking coal is less rosy for the miner, with it predicting less than two per cent growth over the next three years.