Clyde Russell is a Reuters columnist. The views expressed are his own.
LAUNCESTON, Australia, April 28 (Reuters) – Coal producers in Asia are currently their own worst enemies, raising output in a bid to boost revenue in order to compensate for lower prices.
Economic logic would suggest that when the product you make is in oversupply, eventually prices will fall to the point where output becomes loss-making and is shut down. However, this logic isn’t applying to Asian coal markets, with miners ramping up output by more than demand is increasing.
The short-term impact has been that spot prices have tumbled, with benchmark Australian thermal coal at Newcastle Port dropping to $73.12 a tonne in the week to April 25. That is not far from a four-and-a-half-year low of $72.98 hit last month.
The price is also down 15 percent so far this year and has almost halved since the post-2008 recession peak of $136.30 a tonne, reached in January 2011. The response to this collapse in pricing has resulted in some production leaving the market, most notably in China and the United States.
But the main coal exporters of Australia and Indonesia appear to be increasing output, with miners perhaps betting each other that they won’t be the first to go bankrupt.
BHP Billiton, the world’s biggest miner, raised output of thermal coal by 14 percent and coking coal by 28 percent in the quarter ended March 31 from the same period a year earlier.
While acknowledging that times are tough and prices are unlikely to improve any time soon, BHP’s view is that by pushing for volumes it can lower unit production costs and thereby maintain profitability.
This view seems to be shared by other miners, with the Australian government’s Bureau of Resources and Energy Economics forecasting in its March quarter report that the nation’s 2014 exports of thermal coal will rise 3.7 percent to 195 million tonnes, having expanded by 10 percent in 2013.
While that does represent a slowing in the rate of growth, the fact that they are expected to increase at all in the weakest price environment since the global recession shows that market forces appear not to be working in coal.
Australian miners are also hampered by “take or pay” contracts for rail and port, meaning they have to pay for the capacity to export whether they use it or not.
This means it’s often cheaper to continue mining and exporting at a loss than it is to simply shut down a mine.
This can be seen in the shipment figures from Newcastle, the world’s biggest coal export harbour, which have been robust in recent months.
For the rest of this article, click here: http://in.reuters.com/article/2014/04/28/column-russell-coal-asia-idINL3N0NK1DB20140428