Over the last few months, we’ve highlighted the various pressures facing the U.S. coal industry — and those pressures are still continuing to mount.
The hydraulic fracturing revolution sweeping America’s shale geology continues to unearth record amounts of natural gas and drive prices for the fuel towards record lows. At the same time, the Obama administration and the EPA have issued sweeping new rules designed to limit carbon-dioxide emissions from new power plants.
These rules effectively block the construction of new coal-burning plants and make natural gas even more attractive. All in all, that’s causing a monumental shift in the way utilities generate electricity.
Since the industry is confronted with these two major factors, it’s easy to see how the last few quarters have been plagued with lower earnings, dwindling share prices and the first bankrupt coal-casualty: Appalachian miner Patriot Coal (PINK:PCXCQ).
While there has been some glimmer of hope on the back of rising natural gas prices, coal investors aren’t out of the woods just yet. It seems that the contagion in the U.S. is finally being exported across the globe.
Global Prices Drop
It’s shaping up to be cold winter for the global sector. Despite healthy general demand from Asia and Europe, supplies remain in excess as many U.S. firms try to export their way out of the state-side crisis. Those robust supplies have caused global prices for the fuel to drop steadily across the board over the last few months.
On average, these prices are currently trading roughly 20% to 30% below their levels from a year ago. Benchmark Australian Newcastle thermal coal fell to a two-year low of $87 per ton back in June. Newcastle priced coal traded at roughly $142 per ton at the beginning of 2011. Similarly, Indonesian benchmarked coal has dropped sharply from its 2011 highs.
Things aren’t much better in China, the current main driver for commodities demand and pricing. Benchmark coal prices in the country, which is the world’s top producer and importer of the fuel, have been touching two-year lows of $98.50 a ton since the end of July. Amid the global supply glut, inventories in the nation remain at much higher than normal levels.
Overall, analysts estimate that the healthy coal export market means that prices for the fuel will continue to drop. BarCap predicts that API2 European coal will average $94 per ton in 2012, and $92 a ton in 2013. Other global benchmarks will follow a similar downward trajectory — especially if global economic growth continues to falter.
The slide in prices is finally beginning hurt miners across the sea, just as it has producers in the U.S. Coal is Australia’s second-largest source of export income — after iron ore — and represents nearly $47.8 billion in 2011. But as Newcastle benchmarked prices have plunged, so have the opportunities in the nation’s mining sector to make profits. Mining giant BHP Billiton (NYSE:BHP, BBL) recently announced that it will close its Gregory mine in Queensland due to lower realized coal prices amid higher production costs. The Gregory open-pit mine has been in continual operation since 1979.
Following BHP’s closure, Xstrata (PINK:XSRAY) announced that it will lay-off 600 workers in Australia’s coal sector and Rio Tinto (NYSE:RIO) has begun curtailing and idling some production with the nation.
Likewise, various Russian and Indonesian producers are now beginning the necessary steps to close capacity. Commodity analysts at Goldman Sachs also estimate that there will be more coalmine closures in the final quarter of 2012 — knocking out roughly 6 million tons of thermal coal capacity as well as 4 million tons worth of coking coal.
Time To Buy?
The last few articles I penned about the industry’s recent struggles have all been summed up in the same manner: The coal industry will continue to consolidate and undergo a shakeout of sorts as these long-term pressures take hold. With the problems of lower coal prices amid excess supplies now drifting across the sea, that shakeout/buying opportunity is getting closer and closer.
Overall, these global mine closures will have a real effect on worldwide coal prices in due time and — despite the EPA’s recent legislation here in the U.S. — the fuel source is still a major contributor to the world’s energy pie. Similarly, the bulk of the world’s steel production is still done with metallurgical coal, not natural gas. So in the long run — much like nuclear energy — coal is going anywhere.
While I’m not sure I would want to nimble quite yet, The Dow Jones U.S. Coal Index’s 32% decline and the globally-based Stowe Coal Index — as tracked by The Market Vectors Coal ETF (NYSE:KOL) — 22% year-to-date fall illustrates the extent to which the material has fallen out of favor with investors.
Those declines are starting to look mighty tasty for longer-term portfolios, and the time to finally add some real coal exposure could be close by.
As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.