Happy new year, coal producers! Or maybe not.

To coal producers, 2015 must have seemed far longer than 365 days. From their perspective, as bad as markets were at the beginning of the year, and they were genuinely awful, they look positively effervescent compared to today. Coal markets now? Demand: weak. Supply: excessive. Prices: tumbling. Margins: emaciated. Who can blame coal producers for rushing to close the books on a really bad year and shifting their gazes to tomorrow?

Ah, but what might tomorrow bring? No help from across the Atlantic. It may not be running away from coal, but Europe is at least swiftly walking. In the US, low natural gas prices and steady political pressure will further depress already weak coal demand and prices. Latin American and African demand are, well, as inconsequential as always.

In the Asia-Pacific region, Chinese seaborne market dominance has faded as the country snubs coal while simultaneously (and contrarily) protecting domestic producers. Only India and southeast Asia will increase imports, but just modestly. So, across the industry, 2016 promises more pain than gain.

It’s what producers won’t do that matters most. They won’t sufficiently rationalize production to balance supply and demand. They won’t, because most of them can’t, repair debt-laden balance sheets and that will leave many vulnerable and their bond-holders squeamish. They won’t find it easy to re-capitalize their mines because financers are backing away from coal.

Coal producers are going to suffer through another painful year, perhaps even worse than the last one. In fact, producers are facing several years, if not decades, of low prices, anaemic demand, chronic overcapacity and “margins” that would scare most non-coal businesses into closing their doors. But not coal producers.

This is a resilient and optimistic bunch, accustomed to long periods of low real prices and profitless years. They have been here before although they will find that this extended poor market is just the beginning. With concentrated global action underway to address climate change and with the cost of renewable energy on a swift and impressive decline, many coal producers may finally meet their Waterloo. A long, slow harvest is inescapable.

There will be survivors, of course, who will be focused on strategies that lower cost and allow them to compete. Others will turn to long-term strategies that could include energy diversification. But these steps will not alleviate the pain that all coal producers must face in the next few years.
So, coal producers may have found a lump of coal in their Christmas stocking in 2015, but even that will look good by Christmas 2016 … and 2017 … and 2018. For many, better prospects are a rapidly fading memory.

Producer stock prices reflect troubled times for coal (2)

The boom in coal prices is over

Andy Roberts is a mining engineer with a background in operations, planning and market analysis. He has worked in the coal, base metal, oil shale, tar sand and uranium businesses. In 2008, Andy joined Wood Mackenzie where in his consulting and research role he uses fundamental analysis to help his clients understand the status and future of global coal markets. His career includes engineering, market analysis and consulting experience at Exxon, BP, Peabody Energy, RDI and Platts. He holds a BS in Mining Engineering from the Colorado School of Mines and a BS in Forest Management from Oregon State University.


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