SG Commodities Review: Thermal coal

SG Commodities Review: Thermal coal

Paolo Coghe
2013.03.20

■ Throughout 2012 the mining sector started to rediscover some of the investment discipline that had disappeared during the commodity bull run of the last decade, causing an oversupply of coal, exacerbated by a global economic slowdown, and in turn leading to a material price slide and current depressed price levels.

■ Producers have increasingly been responding to global (and local) economic difficulties by cutting or delaying production. However, the overall excess of supply in the global seaborne market will not disappear for a while longer and will continue to cap prices in the short term.

■ We believe that over the first half of 2013 the support to prices could more likely come from a continuation in the reduction of the supply-side surplus than from a demand-side increase. Over the next six quarters, we expect reductions in excess supply to continue (albeit at a slower pace) and ultimately to provide a floor (around the $90-95/t level) for calendar-year products. We also believe there will be a moderate pick-up in Asian demand (underpinned by imports from China and India).

■ Beyond 2013, coal prices will still be driven by the global supply and demand balance. This balance is at present tilted to the side of supply, which is larger than demand on the whole. We still expect the increase in global thermal coal export capacity in 2013-14 to slightly outpace demand growth, causing the market to remain in a state of slack – but with a possible (small) positive lift if China and especially India are able to unlock additional demand.

■ Finally, while prices seem to have bottomed out in 2012, price growth is still hampered by an ailing European economy and by China’s transition to slower growth. We now believe price increases will be more subdued than we previously estimated. So we have tempered our views for prices along the curve. In any case, we continue to believe a meaningful recovery is unlikely before Q4 2013. The situation should improve further in 2014, where the demand from Asia (India in primis) has the potential to act as a primary catalyst in reducing oversupply in the market.