Markets: Coal's darkening days

In a move to combat global warming, governments of the world’s richest nations are cutting support for new coal-burning power plants in developing countries.

Over the past two months the US government, World Bank and European Investment Bank have all dropped support for coal projects. The long-term effect from this is going to be reflected in the ongoing coal price.

With natural gas prices falling, there is a cheaper and cleaner alternative available in the market.

This, along with decreasing import demand from China, has been reflected in coal prices falling from their high of nearly $US140 per tonne in early 2011 to less than $US80 per tonne today, a fall of more than 40 per cent.

In 2011-12 thermal coal was Australia’s third largest commodity export by value, equating to about 6 per cent of export income. Decreased support from governing bodies will have little impact on the volumes of coal exported from Australia, but the concern is around the price.

In February, the Reserve Bank of Australia explained how changing conditions in China had clear impacts on coal prices. Since China moved to be a net importer of thermal coal in 2009, their demand has been the contributing factor to supporting the international market. An easing of imports in the first half of last year has meant falling prices and a weaker outlook for the commodity ever since.

Matching up with falling Chinese imports, coal and coal-miners began to trade lower from April of last year. Whitehaven Coal Limited (WHC) has led the charge lower since then. Australian coal miners aren’t alone – Chinese coal producers have been following a similar path. The Chinese index, the Shanghai Composite, is down more than 1 per cent over the past 12 months, compounding the reality of China’s current economic climate.

Australian coal miners, and the majority of analysts following Whitehaven and New Hope Corporation Limited (NHC), expect their respective share prices to increase over the coming year, with target prices above current market prices. However, the market's view is vastly different at present with share prices depressed from 2011 highs. 

Looking forward, softening prices can only be offset by increases in production to an extent. There will eventually be a convergence between the cost to produce the coal and the price it can be sold in the market, capping the profitability of coal producers.

With the increased investment in Australia in coal seam gas, which is used to produce liquefied natural gas, a much more environmentally friendly energy source, we could be seeing a pronounced shift away from thermal coal in addition to decreased support globally.

From a country perspective, Japan is a perfect case in point – they have been importing less thermal coal and generating electricity from more environmentally-friendly liquefied natural gas. On a smaller scale, natural gas is also overtaking coal as an energy source in some parts of the US.