Bernstein Report sees No Surge in Coal Prices LIke
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The Inarguable Case Against Coal (WSD)based on Bernstein Report
Published Fri, Feb 1st, 2013 Jason Simpkins, Editor-in-Chief
This isn’t the first story we’ve written about coal – but it’s the most important . You see, we’ve long been bearish on the black rock. And looking at Peabody Energy’s (BTU) fourth-quarter earnings statement, it’s easy to see why.
The world’s largest coal company reported a net loss of $1 billion in the fourth quarter. The biggest cause of the decline was a drop in prices for metallurgical, or coking, coal.
Currently the price for coking coal sits at $156 per metric ton – down about 50% from its mid-2011 peak of $312 per metric ton. It’s expected to average just $168 per metric ton in 2013 and $160 per metric ton in 2014, before dropping to $150 per metric ton by 2017.
Power station, or thermal, coal prices are down, as well. Benchmark Newcastle coal sat at $91.05 on January 25, down from $120 in 2011. It’s expected to average just $95 per ton this year, and $100 per ton in 2011, according to data from IHS McCloskey.
And many coal companies are already locked into contract prices that are below even those levels.
For instance, New World Resources, a major European supplier, has agreed to sell thermal coal at an average price of $81 per metric ton for 2013, down from $100 in 2012.
The reasons for these price declines are obvious. Slower economic growth has led to a significant drop in steel production – its main end user. Meanwhile, low natural gas prices and political support for cleaner, renewable energy sources have sapped demand for thermal coal.
Indeed, coal accounted for 37% of all electricity generated in the United States during the 12 months ended September 30, according to the Energy Information Administration (EIA). That’s down from 50% just a decade ago. Meanwhile, natural gas saw its share of U.S. energy production increase during that time, from 18% to 30%.
This is mostly the result of lower natural gas prices, but the move away from coal has also been expedited by tougher carbon emission standards and government subsidies for alternative energy.
Coal producers are hopeful that global demand will surge, giving them a chance to boost their exports, but that’s not likely.
It’s true that global coal demand is expected to rise in the years ahead. But the impact on U.S. exports is likely to be negligible, considering Australian and African producers have closer proximity to the Asian market.
Additionally, China – which is both the world’s largest importer and producer of coal – is cutting back on its imports as domestic production increases and costs decline.
The China National Coal Association said that the country’s coal production reached 3.66 billion metric tons in 2012, a 4% increase over 2011.
As a result, China’s overseas coal purchases will drop 47% to 150 million metric tons this year from 281 million in 2012, according to a recent report from Sanford C. Bernstein & Co.
This decline will coincide with a price decline that will take coal at the Chinese port of Qinhuangdao from $112 per metric ton in 2012 to $105 per metric ton this year.
At this point, China is nearly self-sufficient in coking coal, so prices for the fuel are driven by other major consumers, namely Japan and South Korea.
That’s why Australia, the world’s largest exporter of coking coal, has been increasing shipments. In November, Australia shipped 13.5 million tons of the substance, up 12% from a year earlier. That made for the biggest monthly delivery for 2012.
Now, it’s true that U.S. coal exports are increasing, as well, but that will only be a short-term phenomenon. In the long term, China, Europe and others – like the United States – will come to rely more heavily on cheaper, cleaner sources of energy, such as natural gas, nuclear power and renewables.
So no matter what you hear going forward, remember: Coal is the fuel of the 19th Century, not the 21st.
And “the chase” continues,