Coal prices bounce back this year, but not for good

A rally in thermal coal prices over the past few months, after years of decline, should continue into next year but a cloud still hangs over the market in the form of weakening global demand due to more clean energy and increased energy efficiency. All major benchmarks for thermal coal have risen above $60 a tonne in the past few weeks, an increase of around 50 percent since record lows earlier this year, due to output cuts, supply disruptions, and increases in demand in some parts of the world.
Many analysts expect prices to keep gaining for the rest of this year and into some of next year, but they will then likely go back into decline because the overall trend is one of global demand falling and production cuts could be difficult to enforce when prices are on their way up.
The coal market has been oversupplied for years, which dragged prices down by around 80 percent between 2008 and early this year, forcing producers to cut back investment into new capacity and close unprofitable mines. China, the world's biggest coal producer, is restricting output to reduce a supply glut, lowering output by 280 million tonnes this year as part of a wider plan to close 500 million tonnes of production in three to five years.
Analysts at Citigroup expect Australia's thermal coal, the Asian benchmark, to rise further as the Pacific Basin market tightens due to Chinese output cuts and weak Indonesian exports. Falling European demand may also divert more coal to Asia. "Adding fuel to the fire would be if rainfall due to La Nina was larger than expected, affecting production in Australia and Indonesia, quickly tightening the market," they said.
"Prices could even surge by 25 to 50 percent, or up to $90/tonne based on current prices." In late 2010/early 2011, a strong La Nina drenched coal production areas in Australia and Indonesia, disrupting output and driving up prices to around $145/tonne from $90/tonne. Demand for coal from India, Bangladesh, South Africa, Russia, South Korea, Indonesia and Australia is forecast to rise into next year as coal remains a cheaper alternative for producing energy but US and European demand in particular will wane, mainly due to cheaper gas.
"We remain bearish on the thermal coal market ... Demand has deteriorated further, led by the seasonal decline of our EU Coal Burn Index. The profitability of coal-burning power stations in Europe (rather than gas), is now negative," said Georgi Slavov, global head of energy, iron ore and shipping research at Marex Spectron.