With declining thermal coal prices, shifting supply and demand dynamics in the US and Chinese policy developments regarding the usage of coal in the energy mix, sentiment towards the future of thermal coal is negative.
As current price levels are impacted by increased investment in the coal sector over the last 5 years, suppliers increasing production to lower per unit net operating costs and operators maintaining production levels to meet infrastructure obligations, the supply side has not reacted to the reduced price environment in a textbook manner. In addition, there have not been any recent supply side shocks (floods, cyclones, etc) in key producing countries to dampen customers’ views that access to coal remains uninterrupted.
This sentiment may be masking the true reality of global energy requirements and thermal coal’s role in meeting that demand over the next 5 to 10 years. On the supply side, greenfield and brownfield projects will be harder to develop, production for infrastructure requirement purposes will rebalance and efficiency improvements will reduce the need to attain per unit cost reductions through volume-only initiatives. On the demand side, the need for energy will continue at a rapid rate with further urbanization across the Asia Pacific region and an emerging middle class in key thermal coal demand markets. These factors will present a different economic reality to the thermal coal market over the mid-term and prices should see a rebound.
There are two main questions to be asked about thermal coal: first, how quickly and cost effectively the emerging alternate energy sources, such as gas and LNG, can keep pace with energy demand growth in key markets and, second, how the attitude toward air quality in China, being a significant importer of thermal coal, continues to drive policy and investment in that country.
There remains no doubt that thermal coal will be part of the global energy mix for years to come. In a rapidly changing landscape, however, for thermal coal mines to be sustainable they will need to be on the right side of the cost curve and compete with increasingly efficient alternate energy sources that will benefit from the completion of key infrastructure and volume increases over the next few years.
With that in mind, the focus on cost across the sector is critical and the next wave of efficiency initiatives will see sharing of infrastructure among industry participants and an enhanced use of technology throughout the mining process. We also expect to see more assets change hands in the next 12 to 18 months as traditional owners of thermal mines pursue other opportunities in the current capital constrained environment; different people assess the risks and opportunities differently; new independent mining houses re-emerge; and access to project financing in the current price environment remains challenging.
While it is difficult to read the thermal coal landscape, there is no doubt that the landscape will change rapidly.
“There remains no doubt that thermal coal will be part of the global energy mix for years to come.”
- Anthony Jones
KPMG in Australia