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.

The situation for metallurgical coal is a bit better, but not much. Iron ore and steel prices are also weakening, despite a recent rally.

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).

28 thoughts on “The end of the coal boom?

  1. What a sustained drop in iron ore & coal prices and volume might mean for Australia is a shrinking economy (activity, wealth) especially on a per capita basis. When the federal budget came out I looked for a simple statement of commodity price/volume assumptions but did not find it. The next rebudgeting might be more explicit.

    I understand that Qld coal Royalties are 7% for that part of the price below $100, and 10% above, alarge increase could be coming.

    Upsides to the downside might include slower exhaustion of resources, and oressure aggainst population increases.

  2. Australia is like a flatulent poodle when it comes to furtive emissions. BREE opines that by 2025 our exports of coal and gas will double or treble
    http://www.news.com.au/breaking-news/national/mining-infrastructure-critical-report/story-e6frfku9-1226414554155
    Taking a predicted mid range value of say 300 Mt for both thermal and coking coal and 100 Mt for LNG I multiply by 2.4, 2.7 and 2.8 to get CO2 from our exported fossil fuels of over 1.8 billion tonnes.

    Resources Minister Ferguson appears to be tickled pink at the prospect. It does seem a tiny bit inconsistent with the carbon tax supposedly helping reduce global emissions.

  3. @Kevin Johnson , I’m no fan of “co-investment” and other forms of business welfare. But if governmnts must throw our money at subsidy bludgers I’d far rather they threw it at R&D that has some chance of developing new markets rather than just prop up failure in old markets. Seems to me that Hismelt fits that – if viable it will boost the price of what is now just steaming coal, of which we still have plenty (you’re right we’re starting to run out of coking coal).

    That’s why, unlike many here, I thought the Howard government’s subsidies to carbon capture were a better strategy than pouring money into solar, wind etc R&D. If CCS was succesful then Australia would have got more benefit than other developed countries. If wind, solar etc replaced coal then Australia would still benefit, but by much less than our coal customers would. Our expected payoff from the various forms of renewables differs from theirs.

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