Price said this was mainly the result of slowing economic growth in the key export market of China.
“China is underperforming. Their economy is really struggling at the moment,” Price said in an address to Mines and Money Australia in Sydney yesterday.
“We have also seen record high production rates across thermal and metallurgical coal here in Australia, Indonesia and over in the United States.
“So we’ve seen these large surpluses form in those markets and the prices slow down quite heavily.”
Thermal coal was sitting quite comfortably at $US120/t about 12 months ago, with Price admitting his guidance to clients at the time reflected the view “it was a great place to put your money, with limited downside and all of the other usual broker speak”
“I was far more bearish on metallurgical coal and that has played out beautifully, with my concerns also relating to surpluses forming outside of Australia.”
UBS released its latest commodity price guidance just prior to the conference, with Price putting top-grade thermal coal in the range of $US105-110/t for next year, tailing off to a long-term price of about $US90/t by 2015/16.
“It’s a similar profile for metallurgical coal, with the sorts of things that weigh on my long-term forecasts, even though we see BMA assets under stress in Queensland, is the looming supply in Mongolia and Mozambique. And we will also see some tonnes out of places not known for their metallurgical coal production, like Indonesia and Borneo.”
Another key factor influencing the market is the evolution in the price mechanisms in these trades, particularly in metallurgical coal – but also in the more mature thermal coal trade as it transitions through the later stages of its evolution.
“This is really an important driver of equity investment, so clients want to know how those markets are changing so they know how to re-position themselves.
“Thermal coal is a much larger, more mature seaborne market than metallurgical coal in many ways. There have been a lot more players on both sides of the trade for more than 15 years and it has had spot indices in place … more than 50% of the thermal trade is done on the spot [price].
“Metallurgical coal is really at the start of that evolution. It’s just in the last couple of years that BHP stamped its foot because they were losing-out on annual benchmark contract pricing, so they pushed it to quarterly then continued to push it to monthly.
“Metallurgical coal is really going through the same evolution that thermal coal did 10 to 20 years ago and that completely changes the value companies mining these coals can derive, and that’s something we need to stay on top of.”
Price also addressed the question of how competitive the Australian Coal Industry was.
He said it was generally traveling well and even though the price had come off, Australia was still a dominant exporter of thermal and metallurgical coal.
Australia is the world’s largest exporter of metallurgical coal and the world’s second-largest exporter of thermal coal.
“We’re huge, but big is not enough, we are in a lot of pain because of this weakness in prices.
“You can see why Australian thermal coal producers are making a lot of noise at the moment, because they are sitting right at the top of the cost curve.”
