8 May 2015

Coal's woes likely to continue

7:34 am on 8 May 2015

Economic woes will keep the coal industry sickly for another 18 months to two years, minerals analysts say.

And they say low prices for coal will eventually drive many companies out of business, allowing the survivors to claw their way back from the brink.

Digger loads up a truck at Stockton Coal Mine.

A digger loads a truck with coal at Stockton Coal Mine near Westport. Photo: 123RF

The comments come as the state coal miner Solid Energy dealt with another crisis yesterday, laying off 113 people.

The cutbacks in New Zealand follow similar trends in the United States, Australia and elsewhere.

Yesterday's job losses at Solid Energy come on top of 184 staff layoffs announced a year ago, and were inevitable, according to grim forecasts made two months ago by the company's acting chair, Andy Coupe.

He told MPs then that non-cash and interest costs were pushing the company to another big loss this year.

Solid Energy's problems, and those of its competitors, stem from the price of its coal slipping steadily from over $US300 per tonne four years ago.

Minerals analyst for UBS in Sydney, Daniel Morgan, said that problem was getting worse.

"The declines have accelerated in the past few months," he said.

"The price of coking coal is now about $US80 a tonne and that has come down from a range that was stable last year at about $US115 to $US120."

One of coal's long-standing problems is the shale revolution led by the United States.

This uses fracking, horizontal drilling and other technologies to unleash oil and natural gas in huge quantities at cheap prices, displacing coal, and leaving it unsold in stockpiles, all over the world.

Solid Energy's headquarters.

Photo: RNZ / Conan Young

But a senior commodity strategist at ANZ, Daniel Hynes, said China was another problem.

It over-invested in houses, even entire cities, which are under-utilised, so there is little demand for steel - and the coal that helps produce it - to build any more.

"There have been constraints in the housing market for some time," Mr Hynes said.

"That has resulted in Chinese steel production weakening over the past 18 months or so, and to compound things there is a significant over-capacity of steel in that market as well, and so their demand in consequence has been under pressure for some time."

Mr Morgan said China at its peak accounted for 25 percent of global seaborne trade in steel-making coal, so its cut backs had a huge impact.

And there is another problem: at $US82 per tonne, coal mining in many places is uneconomic, and companies should be going out of business, but they are not, and that is dragging out the problem.

"The US producers, who are the highest-cost in the world and should be exiting the market based on current pricing and economics, have been very slow to do so," Mr Morgan said.

"So the re-balancing that needs to take place in this market has been very slow. The coal market is oversupplied. We need shuts here, we need shuts to occur globally, for those companies that are uneconomic."

Mr Morgan thinks this is unlikely to happen quickly, and so the coal industry is likely to remain in the doldrums for another 18 months at least.