Recently, I have written extensively on how Australian thermal coal exports are coming under intense pressure from the shale gas boom underway in the United States.
To summarise, the huge increase in natural gas production derived from shale rocks has caused significant domestic coal-to-gas switching, which has led to increased competition from US thermal coal exports. Exports from the United States rose by over 50% in the first half of 2012, after almost doubling over the previous two years from low levels. The reduction in demand for coal in the United States also meant that US imports of coal declined. In response, countries that exported to the United States, such as Colombia (which had supplied around 80% of US thermal coal imports in 2011), have increased their exports to other countries.
The rise in thermal coal exports from the US also follows a huge expansion of Indonesian coal exports over the past few years following high rates of investment in resource extraction (see next chart).
The below video from the Wall Street Journal, which is based on “the most exhaustive study to date of a key natural-gas field in Texas, combined with related research under way elsewhere”, argues that the US shale gas boom will accelerate over the next three decades, delivering natural gas prices of only $4 per million British thermal units (mbtu). This is only marginally above the current price of around $3.43 per mbtu.
Obviously, this is bad news for Australian thermal coal exports, which are likely to face further competition from coal dumped on the world market by the US, as well as competition from countries that formerly exported coal to the US.
Deutche Bank has forecast that China’s use of thermal coal is likely to peak within a few years, and by 2017 it could even become a net exporter of thermal coal rather than a large importer, which will drag heavily on global thermal coal prices. In turn, the Australian coal sector is likely to get crunched:
The implications for the Australian coal sector, and its massive expansion plans in ports, mines and rail infrastructure in Queensland and NSW – led by the likes of Gina Rinehart and Clive Palmer – is that the long term price of thermal coal will not be sufficient to make these investments profitable. They could, in fact, become the acts of the greatest futility if they go ahead…
Deutsche Bank… points to the case of China where the new administration is under huge pressure to reduce air pollution levels, which have soared in the past 12 months to 40 times acceptable levels, and put the government under enormous pressure to take action.
In one scenario painted by the Deutsche Bank team led by chief economist Jun Ma, China’s imports of thermal coal would cease by 2017, nearly a decade earlier than most forecasts, and coal consumption would fall from 68 per cent of total energy consumption to 32 per cent by 2030. Clean energy consumption would grow by 12 per cent annually over 2013-2020. as more incentives were put behind solar, wind, gas and nuclear.
China, the second biggest coal importer in the world after the EU, would become a net exporter, tipping the balance in the global coal market. Deutsche Bank coal analysts say in a separate report that this would blow a hole in the global seaborne coal market and send thermal coal prices towards $70/tonne. Australia would be the hardest hit of any coal exporters because it has the highest marginal cost.
Indeed, Deutsche Bank says that even at $87/tonne, some 43 million tonnes of export production from Australia would be forced offline, and investments in Queensland’s Galilee Basin, such as the massive GVK Alpha coal mine part owned by Gina Rinehart, would be delayed. At such prices, these projects would not be profitable, and could not attract finance. It would also have significant profit impacts on current operations for Anglo American, BHP Billiton and Rio Tinto.
If I was an executive of a large Australian coal producer, I would be pulling-back investment ASAP.
Australia’s obvious offset to this, the LNG boom, also had a bad day with BP chief economist Christof Ruhl warning The Australian late yesterday that the combined expansion of US and Australian LNG and a new Russian pipeline to China will pressure LNG oil-linked contracts, as MB has argued:
“If that happens, and I’m not saying it will, you have the same line-up of factors that eroded the oil-linkage in Europe becoming active in Asia,” Mr Ruhl said in Sydney yesterday.
“Clearly, the risks are more towards things changing than remaining the same…Normally in times of change, contracts are maintained as long as possible and then, typically, if it gets completely out of fact with the real world you’ll see some renegotiations going on,” he said.
There’s an energy glut building it seems.
