How supply constraints could see coal prices stay higher, longer
Stratospheric coal prices this financial year and next (and corresponding super-profits for coal companies) could be seen as the start of a new coal boom. But even if the boom doesn’t last long, the new constraints on supply could see mineworkers at existing mines improve their position.
It is common knowledge in the coal industry that we are seeing uncommon prices In mid-May the spot price for thermal coal out of Newcastle was pushing US$400 per tonne, while coking coal contracts were being done at US$550 per tonne.
I never thought I would ever see such prices, and nobody else foresaw it either. A combination of recovery from the pandemic, the China ban on Australian coal (forcing a reconfiguration of the market away from lowest cost arrangements) and then the Russia-Ukraine war have caused a perfect storm for energy prices and pushed coal up very very high.
But even the official govt forecaster doesn’t think the high prices will be around long. The Office of the Chief Economist (OCE) within the federal Department of Industry forecasts that export revenues will plummet from an extraordinary A$110 billion this financial year to A$41 billion in 2022-23. That’s still relatively high but no longer in the super-profits for mining companies category. A couple of years beyond that and the OCE has export revenues back to the tough times of the 2012-2016 post-Resources boom shakeout.
But is the OCE being overly pessimistic, not so much about demand for coal (which it thinks will plateau and decline) but about how supply-side constraints, here and overseas, may cause prices to be somewhat stronger?
The OCE and many other analysts and forecasters think that global coal production will plateau and decline in the next five years. The impact of the Russia-Ukraine war, where Europe is suddenly looking for alternatives to Russian gas and coal, is assumed not to last. Not just because the war will conclude (it might drag on) but because the very high fossil fuel prices are accelerating the shift to renewables for energy production and even to hydrogen for steelmaking.
But will demand fall as fast as supply is being constrained? It is also well-known that, not only is there no investment rush into new coal mines, and even necessary insurances harder to get, but that mine approval processes have become much harder. If one looks at production over the last decade in Australia, it has actually been quite flat, and is forecast to be flat out to 2026-27. The prices and revenues have gone up and down a lot but not the volumes.
Other major supplying countries also have problem. South African exports are actually falling due to rail infrastructure decline. The USA also has rail and port problems, and there is no likelihood of a major fix as coal production is assumed to decline there in coming years.
Even coal exporter Colombia is showing decline!
If (and it is a speculative if) there are supply-side constraints that are matching or stronger than the demand-side decline, coal prices will stay firmer and the profit margins of existing Australian producers may be resilient.
It has been conventional to assume that there would be over-supply in the coal market as demand declines, and therefore low coal prices, and very tough times for coal companies and workers. But if there are substantial constraints on new supply, those already in the industry (and particularly more efficient producers like Australia) may have an easier time of it.
National Research Director