Just how difficult US coal has become can be demonstrated in a few numbers, starting with the forecast 74 million tonnes less coal expected to be consumed by domestic power stations this year because gas is cheaper.
And then there is the sharp fall in thermal coal exports from 45 million tonnes a year to 28Mt because US coal is struggling against coal from countries with cheaper currencies, such as Australia.
Against that background of lower demand it would seem reasonable to expect big cuts in production but that’s when the story gets worse because everyone seems to be hanging in, waiting for a rebound in demand, with the result being even lower prices and tougher times.
Some observers, such as a team of analysts at the investment bank, Morgan Stanley, can see a silver lining wrapped around the US coal crisis in the form of cheap takeover opportunities with the strongest, such as Peabody, consuming the weakest.
“A challenging 2015 creates interesting entry points for quality names,” is the way Morgan Stanley describes the opportunity with Peabody, Cloud Peak, Consol and Foresight riding out the downturn better than Alpha and Arch thanks to lower cash costs.
The key message from the bank is that 2015 could be the trough in a run of bad years with the current year bringing “a lot of bad news forward” – which can be translated into the next nine months being the crisis time for US coal.
Price forecasts The Hog saw earlier this week include Central Appalachian thermal coal slipping another $US2/t lower to just $48/t, and Illinois Basin thermal coal falling even further with $42/t the price tip for the rest of 2015.
Like the Australian coal industry there is a desperate need in the US for meaningful production cuts in order to deal with a declining market, though even the highest-cost producers seem to be finding ways to survive.
The net domestic result is that prices are low and expected to fall further while stockpiles at power stations keep rising, and are probably not far off hitting the ceiling with one estimate pointing to the “utility inventory” rising from 148Mt last year to a current 188Mt.
The export market also just got tougher with the relentless rise in value of the US dollar, or the fall of the Australian dollar if you prefer your currencies expressed that way.
Just how uncompetitive US coal has become in the Asia Pacific market, and how quickly Australian coal has been able to steal market share, can be seen in the Australian dollar exchange rate which just eight months ago was at US94c and today is US76c – a 19% fall which essentially means that Australian coal is 19% more competitive than in July last year.
Morgan Stanley reckons the forecast 74Mt drop in demand from US power stations will cut utility consumption to 780Mt, the lowest since 1989.
“Deep industry shifts continue to play out, such as regulations, cheap natural gas and renewable, but we believe coal companies remain slow to adjust,” the bank said.
“We do not expect production cuts to keep pace with demand destruction this year, leading to higher inventories.”
Australian coal, despite its currency advantage over US material, did not get through the past week without a fresh warning from financial analysts with another investment bank, Goldman Sachs, noting that “past investment is enough to satisfy future demand”
That assessment lies behind Goldman Sachs arriving at coal price forecasts which are alarmingly below the consensus of other forecasters.
According to Bloomberg, the collective view of financial market analysts is for thermal coal to average $66/t this year, rising to $73/t next year then up to $76/t in 2017 and $83/t in 2017.
Goldman Sachs has a much more pessimistic view, tipping an average price this year of $60/t, which is 9% below consensus, and then barely rising over the next three years to $65/t and $66/t, before slipping back to $65/t in 2018.
Coking coal could be in for a tougher time with Goldman Sachs producing numbers which are even further below the consensus of respondents of the Bloomberg survey.
A snapshot of the differing views looks like this: for the rest of 2015 the Bloomberg consensus for coking coal is $120/t v $115/t from Goldman Sachs – and then progressively $137/t in 2016 from Bloomberg v $125/t from Goldman, $142/t in 2017 from Bloomberg v $130/t from Goldman, and $152/t from Bloomberg in 2018 v $130/t from Goldman.
Australian coal, just as in the US, has entered a period of gross over-supply and slack demand, with more production cuts like those from Glencore the only solution to correcting the imbalance.
