As part of a gloomy assessment of the overall coal market UBS has compiled two important tables of recent and proposed coal projects, with the key being the “incentive price” needed to underpin development.

In the case of Carmichael the incentive price is $US126 per tonne for thermal coal and, for any reader uncertain what incentive price means, it is the price of a commodity needed to encourage investment in a new project.

Given that the recent price for coal shipped out of Newcastle was around $55/t the size of the gap is daunting because it means that for Carmichael to get the go ahead thermal coal needs to more than double in price.

Carmichael is not alone because as far as The Hog can see there are only two projects on the UBS list of 31 possible developments that might get the green light in current market conditions.

The Grootegeluk-Medupi project of Exxaro Resources in South Africa is one and the Thar Coalfield Block 6 of Oracle Coalfields in Pakistan is the other with those two having an incentive price of $44/t and $49/t respectively.

Other Australian projects which fall into the same category of having an incentive price miles above the current coal price include: GVK’s Alpha and Kevin’s Corner projects (each at $116/t), Xstrata/Itochu/Sumitomo Wandoan ($104/t) and the Byerwen project of QCoal ($128/t).

Whether UBS has got its numbers spot on, or not, is not the point in considering what the bank has published in a report titled -- “Coal: Is seaborne trade in terminal decline” which came complete with a big drop in forecast long term prices for thermal and metallurgical coal.

Thermal, the bank reckons, has seen its long term price drop from $82/t to $55/t while metallurgical has seen its long-term price drop from $132/t to $105/t.

The falls are sobering, and they go to heart of a conclusion reached by UBS and that’s the point that the world really does not need many, if any, new coal mines and those which might be developed are only going to be replacements for old mines as they close.

Before getting to some other thoughts from UBS it’s worth looking at a few more thermal coal incentive prices and then a snapshot of possible metallurgical coal developments and their incentive prices.

Joining Carmichael, Alpha and Wandoan in the $100-plus incentive category (ie: need a price of more than $100/t) are the Codrilla project (Peabody) $106/t, Talwood (Baosteel) $156/t, Ellensfield (Vale) $125/t, Elimatta (New Hope) $123/t, Teresa (United Mining) $104/t, Watermark (Shenhua) $100/t, and Springsure Creek (Bandanna) $114/t.

All of the projects assessed have a much lower breakeven coal price. Carmichael for example has a breakeven price of $76/t and Watermark is assessed as $71/t.

But breakeven is not the point of the exercise because all that shows is the price at which a coal project can just survive whereas the incentive price is what’s needed to encourage shareholders to invest because they believe a reasonable profit can be earned, and is the price at which banks might provide debt as part of a funding package.

Among the metallurgical projects on the drawing board most are well outside the latest price for the material of $89/t.

Examples include Belvedere (Vale) $156/t. Red Hill (BHP Billiton/Mitsubishi), $147/t. Eagle Downs (Vale) $154/t. Raven in Canada (Itochu) $145/t, and Amaan in Russia (Tigers Realm) $148/t.

UBS noted that the retreat from peak coal prices had been caused by a mix of cyclical and “worryingly structural reasons”

“Substantial new supply appears not to be needed in the medium term,” UBS said.

On thermal coal the bank said prices would remain cool with China continuing to “retreat” from the trade (buying less coal) while India’s imports were subject to uncertainty as policies there encouraged domestic coal and other forms of energy.

“Seaborne trade is down from peak levels and we aren’t sure it will recover on at least a five year view, given these developments,” UBS said.

On metallurgical coal the key factor is a structural decline in China’s steel industry.

“The early phase of this retreat last year has resulted in China flooding world markets with crude steel,” UBS said. “All the while China has supported domestic metallurgical coal output.

“We see seaborne (metallurgical) trade flat to 2020 and again don’t see significant new mines needed beyond replacing depletion.”