For Q4 of 2015, coal prices dropped once again, down to US$81.
That’s down from US$88 in the previous three months and down from US$110 the year previous.
Prices have been sliding downwards since hitting a high of US$330 in 2011, and, while some observers think the bottom has been hit, most aren’t predicting a recovery until 2017 at the earliest.
Fitch Ratings, one of three nationally recognized statistical rating organizations in the US, for instance, predicts that prices will stay flat into the second quarter of 2016, with the average sale price for 2016 to average US$85/tonne, down from last year’s average of US$102/tonne, while others expect prices for the next quarter to rise slightly to US$82 to $84 per tonne.
The North American supply of metallurgical coal has been reduced as companies like Walter Energy have been put out of business and mines like Anglo American’s Peace River Coal properties have been idled.
But these reductions have been overwhelmed by a glut of coal coming out of Australia. The Australian market was devastated by flooding in 2011, which drove prices up and saw other suppliers try and get into the global met coal industry. But, when the floods subsided, the Australian producers ramped up production, driving costs down and forcing high cost producers out of business.
At the same time, demand for metallurgical coal dropped significantly as the Chinese market shifted, with demand dropping to 48 million tonnes in 2015, a 23 percent reduction in the market.
Now, another change is threatening met coal: the spot market.
When coal mining began in Tumbler Ridge, contracts were multi-year. Indeed, the original Quintette contract with Japanese auto makers was for 15 years.
As the price of coal dropped, Quintette was able to stay in operation, as the mine was locked into prices higher than the world average. At the time, the world prices were about US$43.60, while the Japanese steel mills were paying Quintette US$71.43.
The Japanese coal buyers took Quintette to arbitration to set new prices in 1987, as the price they were locked into was nearly double the world prices. They went so far as to stop taking delivery of TR coal.
By that time, most coal producers negotiated their prices annually.
By the time the new mines started, most contracts had shifted to being negotiated quarterly, which is where the industry sits now.
However, the spot market for met coal has growing, and could soon become the default means of purchasing met coal.
On the spot market, buyers don’t buy based on projected need but on current need.
With Anglo American getting out of coal, though, the markets could be changing.
Anglo is the lead company in negotiating the quarterly benchmark price, which is then used by most of the industry for setting their prices.
Other companies, such as Teck, use those prices. Teck might be interested in picking up those negotiations, but, not having the same volume as Anglo had, fewer mines would accept those prices as a benchmark.
This could create a vacuum, says industry analyst Martin Hookham, senior manager of coal at IHS, a business analysis company, which would then lead to the collapse of the current quarterly benchmark system.
The spot market is much more volatile than the current benchmark system, leading to dramatic swings in pricing as demand increases and contracts.