Markets have soured and the investment boom may be over for now, writes Paddy Manning.
A run of bad news, culminating this week in the failure of a planned $313 million share placement by Cockatoo Coal to its South Korean shareholder SK Networks, has given analysts plenty to think about.
Prices for most grades of metallurgical or coking coal (used for steelmaking) and thermal coal (used for power generation) have been falling for more than a year, since the early 2011 spike driven by Queensland’s floods, Japan’s earthquake and the Fukushima nuclear disaster.
Rising supplies, as Australia’s mines swung back into operation and countries such as Indonesia, Mozambique, Mongolia and China ramped up production, and the glut of US shale gas have pushed prices steadily lower.
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Unexpectedly bad figures for trade in February, released this month, showed falling coal export volumes and prices, sparking a round of commentary that Australia’s terms of trade had peaked and investors would soon begin to mothball mining projects.
At a corporate level, signs of weakness came last month, when coalminer New Hope – controlled by Robert Millner – announced the termination of a sale process triggered by unsolicited approaches last year. Millner said talks never got to price.
Since then, BHP Billiton has announced the closure of its Norwich Park coal mine in Queensland and there are rumours it is looking to close the nearby Gregory Crinum mine.
Rio Tinto has pulled out of a $9 billion development of six new coal terminals at the port of Abbot Point, near Bowen.
Only days earlier, Rio’s coal boss in Australia, Bill Champion, struck an urgent tone in a Brisbane speech, warning the Queensland government could lose billions of dollars of mining royalties if coal projects were not approved quickly.
Citing a margin squeeze in thermal coal, with prices expected to fall by 25 per cent on average to 2020, Mr Champion said Queensland had ”no time to lose” if it wanted to open up the Galilee and Surat Basins.
”In these two areas alone, there are announced plans to go from virtually zero output today to over 300 million tonnes by 2020, with the vast majority of this output being thermal coal,” he said.
”We estimate that a delay of two years for a generic thermal coal project would cut around 70 per cent from its value to the company investing in it.
”There is a real risk of projects missing the current ‘price wedge’ that makes investment possible.”
A UBS commodities analyst, Tom Price, has been bearish on coal for almost 18 months and says the soft outlook means developments far from rail and port infrastructure, in the west of Queensland and NSW such the Galilee, Surat and Gunnedah basins, will be re-evaluated.
Most significant for thermal coal exporters, in his view, is that Asia will begin to develop its own, cheaper unconventional gas resources as fracking and horizontal drilling technologies mature.
”That’s where the thermal coal is going to come under pressure, in the medium-to-longer term,” he says. After adjusting for inflation, UBS expects thermal prices will fall as low as $US85 a tonne by 2015.
Trade in thermal and metallurgical coals is linked, Price says, with some miners able to switch between the two, so a thermal coal producer suffering soft prices will switch part of its output to the higher-value met-coal market.
Price says the met-coal prices are getting some support from the strikes at the BHP-Mitsubishi Alliance mines in the Bowen Basin, where BHP recently declared force majeure. Additionally, as coking coal prices fall below $US210 a tonne, marginal suppliers such as the US begin to cut production, slowing the price decline.
But in the longer term, hard coking coal prices will fall as low as $US150 a tonne, UBS predicts, as lower-cost suppliers in Mozambique, Mongolia and China increase production.
Bruce Jacques, an analyst with IHS McCloskey, says coal miners will be taking ”a more clinical” approach to new developments.
”There’s a huge amount of projects on the drawing boards. It always looked pretty ambitious.”
While he predicts demand for the best hard coking coals will hold up, and he is wary of long-term forecasts, Jacques says ”it’s hard to see a narrative as to why thermal coal should turn around and stop falling. It’s an unrelenting oversupply story for the foreseeable future.”
At thermal coal prices under $US100 a tonne, Jacques says the Galilee Basin projects ”might look a bit dubious”. With a high dollar and the best targets already picked over, Jacques says investors are falling out of love with Australian coal: ”Everybody’s getting the feeling there’s better places to look.”
So is Australia’s coal boom over? ”In investment terms, probably yes,” Jacques says … at least for now.