Downward Revision To Coal Price Forecasts

Out today.


"Metallurgical coal – breaching the $100/t barrier

For a market where seaborne supply growth will likely be negative YoY in 2015, the precipitous decline of the met coal spot price, down 26% YTD to the lowest level since 2006, has come as somewhat of a surprise. We identify two key reasons for this move: 1) that major producers outside of the US have continued to make impressive cost savings, in excess of FX moves, and 2) that the Chinese coal cost curve has fallen and domestic oversupply is growing.

Operational performance reported by the world’s second largest seaborne met coal supplier, Teck, sheds light on the first of these two points. 1Q15 cash costs were down 11% YoY in local currency and 19% in USD. This has resulted in cash margin expansion over the past two quarters and Australian producers are faring similarly well. It is clear that USD prices will remain under pressure in this environment, given that the contestable met coal market is oversupplied. This oversupply has been compounded by China. Chinese apparent production of coking coal has grown strongly over the past 9 months, while domestic demand has collapsed, so it has exported its overcapacity in the form of coke and steel. China is used to having excess met coal supply in the seaborne market pushed its way, in turn it is now pushing a coke surplus back

We have downgraded our premium HCC contract price forecast for 2015 by 8% and by 20-25% from 2016, and have also reduced our real LT price by 7% to $145/t FOB Australia. This price still represents an incentive price (a level needed to bring more supply to market), but increasingly it is looking like this won’t be required until next decade."