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Oversupply and weak pricing on the coal market place continuing pressures on coal producers

The oversupply in the coal industry as part of the transformation in the energy markets poses a number of challenges to coal producers.

The excess, estimated at 10% by Alberto Migliucci, Chief Executive Officer and Founder of Petra Commodities, has resulted in weak coal prices. Demand from the major consumers – China and India – accounts for 90% of imported coal in the world (China alone 50%), according to Anthony Yuen, Director of Commodities Strategy at Citi Research. However demand in China may now be peaking as its energy consumption patterns are changing due to environmental policies. The Russia-China gas deal, shale gas exploration in the US, and American carbon dioxide cutting policies are all factors also likely to affect the market in the long term, remarks Mr Yuen.

In the current market conditions, the key coal producers do not seem to be planning any production cuts but rather focusing on cost cutting.

“The first one who cuts production has the costs going up. The inevitable effect will be that big companies will survive, smaller will be swallowed by the banks and other mining companies, which will settle back the balance in the market by stabilizing supply and demand “, explains Ken Farrell, Director of PT Bumi Resources and Commissioner of KPC. “It’s a race among producers to be the best positioned, be efficient, keep the costs down and the reserves in place”.

Companies will focus on conserving cash, with current coal pricing likely to continue for next few years and fuel prices remaining high, predicts Rick Ness, Director of Indika Energy Tbk. He also expects more attention given to improving technological solutions and extending equipment life.

Vertical integration is not seen as a panacea although it could benefit the strongest players in each market segment, allowing more control over costs and operations.

An extra complication is feared from resource nationalism and government intervention, like tax regulation, which can put off potential investors. Some state policies aimed at coal market regulation are poorly timed and articulated in Indonesia, a country which has moved from a centralized regulatory system to a decentralized one, remarked Rick Ness.

Even though there have been a few asset sales, this is not seen as a trend as there are not many buyers ready to spend cash. As there is still uncertainty whether the market has hit the bottom or there is still more room to go down, the best assets are not likely to go on sale. Furthermore, as exploration spending is put on hold, long term production might be at risk.

Despite so many uncertainties, many companies see the future of the coal industry as assured over next few decades. “Long term the future of coal will be ruled by the environmental concerns but it’s still going to be the most competitive fuel source in the developing world. The renewables will be in the mix but for the next 30-40 years coal will win”, Ken Farrell points out.
This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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