No one needs reminding that miners face tough times as commodity prices continue south. But last week Anglo American boss Mark Cutifani reminded investors anyway. In a speech he used the word ‘grim’ to describe the outlook for the industry, in particular for thermal coal. Sure, his words were aimed at Australian policy makers to highlight how regulation is eroding the country’s competitiveness in mining. But producers of thermal coal, which is used to generate electricity, have more than just that to worry about.
Prices of seaborne thermal coal have halved since the start of 2011 to about $90 a tonne. The problem is oversupply, which looks set to continue. The shale gas discoveries in the US have pushed coal miners there to seek new markets. And while China is the world’s largest producer of thermal coal and only imports 6 per cent of its needs, it still accounts for a quarter of the seaborne coal market and all of the growth in this segment over the past five years. But as China shifts from industry to services, power usage should steady, and if the country’s slowdown accelerates energy demand could even fall. Moreover, China keeps adding to coal production capacity, while transport efficiencies could bring down its own coal prices further. Bernstein warns that China could be in a position to export coal within the next few years.
This would impact the seaborne market that the big miners depend on to drive coal mining earnings. Anglo is most exposed, expected to derive over a fifth of its operating profit from coal in 2014. Xstrata’s merger with Glencore reduces its dependence on coal, but coal will still be a sixth of profits, estimates Deutsche Bank. And even though Anglo is at the bottom of the cost curve relative to peers a 10 per cent adjustment in prices could impact earnings by over a tenth. More cost cutting, especially in Australia where expenses have more than doubled during the past seven years, and production curbs are needed.