Coal awaits boost from China as US power companies cut use

Written by Banikinkar Pattanayak | Noor Mohammad | Noor Mohammad | New Delhi | Updated: Nov 17 2012, 09:06am hrs
Global coal prices have tumbled by more than 30% in the past one year and 4% so far this month on slowing economic growth, tighter environmental norms and the promise of shale gas as an attractive alternative for power generation in the US. This has hurt global miners, including Rio Tinto and BHP Billiton, which are increasingly cutting costs to improve margins and looking for a pick-up in Chinese demand.

The average price of the benchmark Australian thermal coal dipped for a third straight month in October to $88.29 per tonne compared with $127.92 a tonne a year earlier and has since dropped to $84.45.

The price has crashed by more than 56% since scaling an all-time-high of $192.86 in July 2008, thanks to a supply glut and poor demand from top energy users such as the US and China.

Similarly, natural gas prices have plunged with expanded production from new fields, making it increasingly affordable for power plants as an alternative fuel. The price of natural gas has slumped over the years by more than 72% to $135.84 per thousand cubic metres now since hitting a record $490.82 per thousand cubic metres in October 2005.

Rio Tinto recently said its Australian Coal & Allied Industries unit, which produces 30 million tonnes of coal annually, would trim jobs mainly due to a sharp drop in coal prices. BHP Billiton, the world's biggest exporter of metallurgical coal used in steel making, last month warned that cost pressures were making it hard to justify expansions in Australia, with coal prices unlikely to go back to all-time highs.

Adding to miners' concerns, the US is finalising environmental standards which would make it hard for power firms to justify the use of coal when supplies of cleaner alternative fuels, including shale gas, remain adequate at affordable prices, analysts said.

No wonder many US power firms are increasingly switching to gas as fuel for generation. The fuel cost for gas-based power plants is estimated at R2.30 per unit in the US, slightly more expensive than the R2 a unit incurred at coal-fired units, analysts said.

However, emissions at a plant using gas plunge by half compared with coal-fired stations, making the fuel a more attractive option in times of increasing global resolve to fight the climate change.

According to US government data, coal-fired generators will likely produce around 37% of the country's power in 2012, down from 42% a year before, while natural gas' share of total generation is forecast to touch 31% this year from 25%.

So any possible uptick in coal prices now hinges on the rise of China and other emerging economic powers, including India, which rely on the cheaper coal for power generation due to inadequate domestic gas finds.

Earlier this week, the International Energy Agency said the US could overtake Russia as the world's biggest gas producer by as early as 2015 and also dethrone Saudi Arabia as the largest oil producer by 2017. This means gas supplies would improve dramatically in the US in the near future.

Although a sustained fall in coal prices squeeze the margins of miners, analysts say as of now there is not much of a threat to their valuations.

"If coal is intended to be traded in the open market, valuations of assets would be impacted with the falling market rates. However, valuations also depend on other factors like the mining cost and intended end use," said Dilip Kumar Jena, senior consultant and knowledge manager, coal and mining, PwC.

Moreover, coal continues to be the cheapest fuel for power generation in India, as the cost for plants using domestic gas is estimated at R2.75 a unit while it works out to R2 a unit for those using supplies from Coal India.

However, the difference between fuel costs for power plants using imported liquefied natural gas (LNG) and those employing imported coal is significantly high.

While the variable cost for plants using imported coal is R3.50 a unit, it could go up to as high as R8-9 a unit for plants using spot market LNG.