One of the big hopes for a revival of the U.S. coal industry since the election of President Donald Trump is increasing exports. Right on cue, it looks likely that more of the fuel will be shipped to foreign buyers.
But this is a short-term boost and will benefit only a few U.S. coal miners, with the rest having to deal with domestic demand trending lower. The grim reality is that they can’t compete with exports from lower cost producers around the globe.
While Trump may have declared an end to what he termed the “war on coal” of his predecessor Barack Obama, the U.S. coal sector is unlikely to export its way back to robust health.
This is simply because U.S. coal producers are too expensive to compete on global markets, especially in Asia, the region where coal demand is growing fastest and likely to remain the only bright spot in a world increasingly trying to move away from the polluting fuel.
The short-term boost to U.S. coal exports is virtually all down to Cyclone Debbie, a category four storm that closed mines and damaged infrastructure in eastern Australia’s Queensland and New South Wales states, when it made landfall on March 28.
Queensland accounts for about 60 percent of Australia’s exports, including the majority of coking coal, the higher-quality fuel used mainly in steelmaking. Australia is the world’s largest exporter of coking coal and second to Indonesia in thermal coal, used mainly in power plants to generate electricity.
While the majority of mines were able to restart operations fairly quickly, it’s taking time for the rail infrastructure to be repaired, meaning there is a shortage of coal for export.
This has sent prices soaring, with coking coal futures in Singapore – priced off the spot assessments for free-on-board Australian cargoes – soaring 77 percent from the day Debbie struck to a peak of $275 a tonne on April 6.
Thermal coal prices also rose. Even though shipments of the this grade of fuel from Australia weren’t nearly as badly affected by Debbie, the benchmark weekly index rose 9.1 percent in the week to April 7 from the week prior to the storm’s arrival.
While thermal coal supplies from Australia may be slightly constrained in coming weeks, the main issue is in coking coal. Chinese, Japanese, South Korean and Indian steelmakers are all scrambling to source alternative supplies.
The Chinese will look first to neighbouring Mongolia and Russia, while the others will cast a wide net – including as far as the United States.
This is a boon to U.S. coking coal producers, many of whom are located in the Appalachian mountains, the region that has borne the brunt of the decline in domestic coal consumption.
Assuming these miners can ramp up production, they likely have a six-week to two-month window to lock in exports at higher prices before Australian mines can resume normal deliveries.
As much as 15 million tonnes of Australian coking coal may be lost to the market from Debbie. That’s significant, but still below the estimated 25 million tonnes lost to Cyclone Yasi in 2011, which prompted spot prices to rise to above $330 a tonne.
U.S. EXPORTS MOVING UP
There does appear to be an uptick in U.S. exports already in April, with Thomson Reuters Supply Chain and Commodity Forecasts estimating that 6.8 million tonnes has already been booked for shipment in the month.
Given only one-third of the month has passed and more cargoes are certain to be booked, this looks strong compared to the 7.56 million tonnes exported for the whole of March.
Last month was already the highest monthly total recorded since January 2015, the starting point for Thomson Reuters vessel-tracking and shipping data.
U.S. coal exports have been on a declining trend, with 2015’s 75.36 million tonnes slipping to 65.77 million last year.
This is largely because of lower purchases from top destination Europe, where U.S. thermal coal struggles to compete against similar quality coal from Colombia and South Africa.
U.S. coking coal remains sought after by European steel mills and is competitive against supplies from Russia, the main alternative for Europe given Australia is too distant and freight costs would be too high.
But U.S. thermal coal is unlikely to able to compete anywhere around the globe, given the higher cost of production.
Data from consultants CRU show the that weighted average business cost for U.S. thermal coal, or the price where 50 percent or more of operations in the country are making positive cash flow, lies at $83.22 a tonne.
This is well above $39.49 a tonne for Colombia and the $48.73 for South Africa, showing that even with a slight seaborne freight advantage, U.S. thermal coal cannot even compete in Europe, far less Asia where the shipping costs would be much higher.
Australia’s weighted average business cost for thermal coal is $53.98 a tonne, and for coking coal it’s $67.34, according to the CRU figures.
The U.S. coking coal cost is $86.62, which shows that it can be competitive globally, even with higher freight costs – as long as the coking coal price remains at elevated levels.
Coking coal enjoyed a strong rally last year on the back of strong Chinese demand as steel production rose in the world’s second-biggest economy and domestic coal output dropped because of policy constraints.
Since peaking around $300 a tonne in November, coking coal has retreated and appeared to be finding a base around $155 a tonne. But that was before the arrival of Debbie.
When Australian supplies return to normal, it’s likely that coking coal will once again head back to around the $150 mark, and possibly even lower given the uncertain outlook for China’s steel sector this year.
This will make it harder, but not impossible, for U.S. coking coal miners to compete in Asia, and they are always likely to be the supplier of the marginal tonne to the region.
Unless U.S. coal miners can find a way to significantly lower their costs, the simple truth is that they cannot compete globally in thermal coal, and will struggle to compete in coking coal outside the European market.
Source: ReutersPrevious Next