Dark outlook for black rock

About 40 per cent of Australia’s thermal coal production may be loss-making, and Chinese demand is slowing.

The energy market is undergoing structural changes, driven by slowing global growth which is reducing demand for power. When it comes to energy, slowing growth in emerging markets is not desirable since more modest economic growth will lead to more modest energy consumption.

Consequently coal is in the heart of transition, according to Seth Kleinman, global head of energy strategy at Citi. Current coal prices and costs to produce in Australia mean it is simply too difficult to justify an investment in the black rock. 

It isn’t just a myth – Yancoal’s Stratford operation recently closed because of high operating costs combined with low commodity prices. At current levels, around 40 per cent of Australian thermal coal production could be unprofitable, according to National Australia Bank’s October commodity update.

Adding to the woes of Australian coal miners is the Australian market being in oversupply of thermal coal. National Australia Bank’s report details coal import volumes to China have been in a trend decline since the middle of last year. The oversupply is not conducive to rising coal prices in the short term.

Before energy sources other than coal became viable options, it was taken for granted that China would drive demand for coal for decades to come. It is a completely different story now as China undergoes a structural change, moving from an industrial-focused to consumption-focused economy, which will in turn alter the amount and way in which they consume thermal coal.

The most notable changes in China are a move lower in GDP and energy consumption. Beyond this, there is also the rise of renewables and natural gas that will compete with thermal coal as energy alternatives.

Recently China has taken action and gone as far as to phase out four coal generation facilities by 2015 in favour of natural gas alternatives. With China accounting for nearly 50 per cent of thermal coal consumption globally, moves like this will be increasingly felt by the thermal coal market and especially Australian coal miners due to supply capacities and the costs to produce.

Outside of China, coal consumption has tailed off in other key markets. Sometime around 2009 coal claimed half of the US energy production; by 2012 it had fallen to 40 per cent.

Environmental concerns in conjunction with the feasibility of more sustainable alternatives are forces against coal. Years ago, coal was going to become bigger than oil, but developments across liquefied natural gas and shale gas have changed this.