Coal’s record slump poised to end on output cuts

European coal’s longest slump in at least eight years is poised to end as imports from the U.S. fall and further declines trigger production cuts at mines in Russia and Poland.

Next-year prices have extended four quarters of losses to trade near $90 a metric ton, according to data compiled by Bloomberg. That’s a “crucial” level below which some producers can’t continue to operate, said Paolo Coghe, an analyst at Societe Generale SA. Kompania Weglowa SA, Europe’s largest coal producer, is cutting output by 8 percent this year, Chief Executive Officer Joanna Strzelec-Lobodzinska said May 13 in Katowice, Poland.

German utilities are burning record amounts of coal, which is twice as polluting in power generation as natural gas, after a glut sent prices to their lowest level in three years. Exports from Indonesia, Australia and Russia will slow after a 25 percent jump in global seaborne supply in the two years through 2012, according to Deutsche Bank AG, just as Europe’s economy is poised to expand for the first time since 2011.

“If the European economy recovers and some producers decide to cut their output due to the weakness in the coal market, prices will pick up again, especially if U.S. exports drop,” said Barbara Lambrecht, an analyst at Commerzbank AG in Frankfurt who has covered commodities for six years. “Coal prices won’t rise to the skies. For that, supply on the market is too abundant.”

Limited Potential

Coal for delivery to Amsterdam-Rotterdam-Antwerp next year, the benchmark European contract, rose 0.1% to $91.40 a ton as of 11:10 a.m. Berlin time today, according to ICAP Plc data on Bloomberg. The contract has dropped 9.6 percent this year.

“Prices should not fall much further but upside is limited,” Coghe said in an interview from Paris. “There is a floor at around $90 a ton for next-year coal, which triggers cuts to more expensive supply, for example in Russia, which couldn’t sustain production levels at such low prices.”

Thermal coal shipments from Russia, the third-biggest exporter, fell 2.2 percent in the first quarter to 26.27 million tons from a year earlier as production declined 2.3 percent to 65.58 million tons, Kirill Chuyko, head of equity research at BCS Financial Group, said May 15 by phone from Moscow.

U.S. coal exports, excluding cargoes to Canada and Mexico, increased 55 percent to 46 million tons in 2012 after more than doubling a year earlier, according to Deutsche Bank. Shipments will probably drop to 35 million tons this year as gains in natural gas prices increase the competitiveness of coal in power generation, Michael Hsueh and Michael Lewis, analysts at the bank in London and Paris, said in a May 9 report.

Price Pressure

“Pressure on thermal coal prices from U.S. supply will be held in check” this year, they said. “The evolving supply-demand dynamics of thermal coal in the U.S. have the potential to have a larger negative effect on global seaborne prices in the next decade than we observed in 2012.”

U.S. natural gas futures gained 0.8% to $4.225 per million British thermal units as of 11:15 a.m. today, after falling to a 10-year low of $1.902 in April 2012 on the New York Mercantile Exchange.

There’s been a “dramatic improvement in coal fundamentals from this time last year,” said Greg Boyce, the chairman and chief executive officer of Peabody Energy Corp. (BTU), the largest U.S. coal company by sales.

“Production cutbacks, mine closures and project cancellations or delays are likely to continue in most coal-exporting countries around the globe,” he said April 18 on an earnings call.

Power Demand

Demand for power in Germany, Europe’s biggest economy, slumped 1.3 percent last year to the lowest since 2003, according to AG Energiebilanzen e.V., an association of energy lobbies and economic research institutes.

The euro area economy will grow 0.2 percent in the fourth quarter, the first increase since the last three months of 2011, according to the median of 34 economists in a Bloomberg survey. Gross domestic product contracted 0.6 percent last year.

German electricity generation from lignite, the most carbon-intensive type of coal, rose 9.8 percent in the first quarter to 40.9 terawatt-hours from a year earlier, while generation from hard coal, a less-polluting grade, increased 23 percent to 36 terawatt-hours, data from the Federal Statistical Office show.

While European coal for next year may extend declines, a seasonal minimum will develop in coming weeks as utilities build stockpiles before the summer, according to Melinda Moore, an analyst at Standard Bank Plc in London.

Profitable Exports

“Both Colombia and Russia are exporting tons profitably” at spot prices $8 a ton lower than the year-ahead contract, Moore said by e-mail on May 10, when the month-ahead contract closed at $83.25 a ton. It traded at $81.20 today.

Spot cargoes probably wouldn’t be offered below $78 a ton, assuming an oil price of about $100 a barrel, according to Trevor Sikorski, the head of natural gas, carbon and coal at Energy Aspects Ltd. in London.

“If there are no supply outages, the market will have a lot of coal hanging around and it’s hard to see much of a way back unless there is a more concerted approach to cutting back on production,” he said.

Kompania Weglowa is reducing output to 36 million tons this year from 39 million tons in 2012 and possibly a further 1 million tons next year, Strzelec-Lobodzinska said in an interview. The cuts will help erode company stockpiles of about 6 million tons, equivalent to more than two months of production.

Coal miners in Poland are struggling to extract the fuel profitably, according to Artur Trzeciakowski, chief financial officer at Katowicki Holding Weglowy SA, the nation’s third-largest producer by output.

Breaking Even

“There are mines in Poland, including those that belong to us, where mining costs are nearing the line of the market price, that line is around $90 per ton or slightly below,” Trzeciakowski said May 10 by phone from Katowice.

At about $90, “some of the coal mined in the U.S. and Australia is being sold at a loss,” Nigel Yaxley, deputy president of the European Association for Coal and Lignite, a lobby group based in Brussels, said May 15 in Katowice. “The natural thing is capacity closures but the problem is that people are hoping that someone else would do it.”