The end of the coal boom?
The sharp drop in the price of coal over recent months might be just one of the fluctuations that go on all the time in commodity markets. That’s the preferred view of Fitch Ratings cited by Coalspot, saying “the weakness seen in thermal coal prices in recent months should reverse once demand from major importers recovers”. On the other hand, though “there is a risk low prices may persist into 2013, changing the industry’s supply side dynamics.” The crucial point is that most coal contracts are negotiated annually, so suppliers can ride out months, but not years, of low prices.
News from the US today increases the likelihood of a sustained drop in prices. The US Court of Appeals delivered a complete and unanimous rejection of an attempt to block regulation of CO2 emissions by the EPA, under the Clean Air Act. That could be overturned if the Repubs make a clean sweep in November, but otherwise it means, for practical purposes, the end of new coal-fired power plants in the US, and the shutdown of many existing plants. As noted in the Fitch report, declining US demand for coal is already pushing US coal onto world markets, contributing to the declining price.
Fitch is optimistic about demand from China and India, but there’s plenty of room for doubt about China. Not only does it appear that economic growth is slowing, but China is giving a lot of support to renewables which are now the focus of an incipient trade war with the US, and may also be expanding doemstic coal production. From whatever cause, coal is piling up on the docks.
What does this mean for Australia ?
Very little, according to the Bureau of Resources and Energy Economics, which predicts soaring growth in exports of both coal and iron ore, at least for next year.
The BREE analysis is based on the fact that a lot of projects are already at an advanced stage. But if a soft demand outlook is combined with a locked-in expansion of supply, that must cast doubt on the viability of projects that are at an early stage. It’s worth bearing in mind that Chinese domestic supply has the potential to grow rapidly, and there are plenty of projects under way in Indonesia and elsewhere.
In employment terms, the big effects of the mining boom have arisen from projects in the construction phase – mining itself is much less labour-intensive. So, even if output continues to grow, employment in the sector could decline if the pace of construction falls off.
I’m not sure about implications for exchange rates. It seems that the exchange rate is driven mainly by capital flows these days, so if inward investment fell, the $A might depreciate, even with minerals exports remaining strong. That would be good for producers of other traded goods and services, and would help to rebalance the economy.
I haven’t discussed implications for climate change. Obviously these depend critically on whether any decline in world prices is driven mainly by declining demand (in which case emissions will fall) or by increasing supply (in which case they will rise).