Australian thermal coal continues its downward trend and the industry faces serious economic challenges, according to a new report showing the coal price at a 4-year low.

The report by the Institute for Energy Economics and Financial Analysis (IEEFA) analysed recent global thermal coal trends that impact the Australian coal industry and found the weakness in the coal price leaves the average Australian mine at cash break-even.

“The Australian coal industry faces significant economic challenges, as a number of factors of oversupply and weaker than expected demand growth combine to put downward pressure on prices, thereby seriously impacting on the financial viability of coal mines,” Tim Buckley, Director of Energy Finance Studies, Australasia for IEEFA said.

“Established coal markets for Australian thermal coal such as Japan, India and China are undergoing structural changes as renewables gain market share and policy choices diminish coal’s short and long term viability.

“The Australian dollar has strengthened against the US dollar, compounding the continued decline in the thermal coal price, down 22% year-on-year to a 4-year low of US$73/tonne.

“The coal price is weakened by excess supply and lower than expected demand growth, particularly in China, making Australian mine development less financially attractive,” Mr Buckley said.

The oversupply of coal is exacerbated by the long-term “take-or-pay” liabilities – that is, contracts accepted by coal suppliers in Australia and the US that require them to take the coal rail and port allocations or pay a significant penalty.

The decision by Peabody Energy to sell the recently closed Wilkie Creek coal mine for US$70m in part reflect significant take-or-pay infrastructure contracts attached to the mine.

“Fourth quarter 2013 gains in coal prices have been reversed as oversupply and policy changes drive down demand, with a number of major Australian greenfield mine, rail and port capacity proposals have been shelved in the last year.

“Following on from IEEFA’s recent report showing that Queensland’s Galilee coal projects are financially unviable, this further demonstrates that the Australian coal industry is facing structural economic decline.
“Meanwhile, install rates of renewable energy sources such as solar and wind are forecast to grow a combined 90GW globally in 2014,” Mr Buckley said.

Note: Australian coal exploration company Stanmore Coal has this week estimated that 40% of global seaborne-traded thermal coal production is “unprofitable at current pricing levels.” See: http://www.platts.com/latest-news/coal/perth/australias-stanmore-calls-40-of-seaborne-traded-26787099.

Tim Buckley is the Director of Energy Finance Studies, Australasia for the Institute for Energy Economics and Financial Analysis. He has 25 years of financial markets experience, including 17 years with Citigroup culminating in his role as Managing Director and Head of Australasian Equity Research.

A copy of the latest IEEFA briefing note can be found here: http://www.ieefa.org/thermal-coal-outlook-may2014/