The steam-coal market is expected to remain challenging for the next few years, due to prices close to all-time lows, a hugely oversupplied Chinese market, uncertain Indian market growth, and diminishing consumption across Europe, the United States and China, according to business analysts IHS, but signs are starting to emerge of a recovery in the market, and that supply and demand will rebalance later this decade.
Like any other commodity, coal follows the trend of boom and bust, with the boom cycles normally a lot briefer in duration than the latter. Currently rooted at the bottom of the bust-cycle, the coal industry finds itself in a challenging position for the same reasons weighing on other commodities, an oversupplied market, which continues to suppress global prices.
"The ground has already been laid for the next boom in coal prices, and the longer the wait for price recovery goes on, the greater the likelihood that values will spike," said David Price, senior director of the Global Steam Coal Service at IHS Energy.
In 2015, prompt European steam coal prices from key suppliers including Colombia and Russia averaged $56.77/tonne delivered ex-ship to Amsterdam/Rotterdam (DES AR), based on an energy content of 6000 kilocalories (kc) per kg on a Net as Received (NAR) basis. In 2014, prices averaged $77.20/t (DES AR), and today, they are struggling to hold levels of $45.00/t DES AR. The situation has led to a spate of mining industry bankruptcies and divestments around the world, while what is left of the international coal-mining sector is working ever harder to cut costs in order to stay profitable.
IHS Energy’s Global Steam Coal Service published forecasts of prices at an average close to today’s level for most of the rest of this decade. David Price said before the market can stabilise, prices may still have to decline further. "We believe that prices in 2016 may have to come down further from 2015 levels, but probably not by as much as they did from 2014."
The over-enthusiastic investment in anticipation of a Chinese import boom that did not happen was the main trigger of the collapse in prices. It has brought the delivered steam coal prices down in Europe from around $125/t in 2011, to a monthly average of just $46/t in March 2016, barely $20/t above 2002’s all-time low of below $26/t. Steam-coal prices hit a record high of almost $210/t in July 2008 just before to the financial crisis.
However, according to IHS energy experts, the prices should begin climbing as 2020 approaches. "It is today’s weakness that is laying the ground for tomorrow’s market strength," Price said.
Price is firm in his view that, "the longer this bear market continues, the greater the chance of a substantial spike in prices, because the industry will not be in a position to respond to the demand side when that first additional tonne of coal cannot be supplied."
The key to any price recovery, he added, will be tightening supply, which is expected to emerge now that investment in new capacity has all but dried up. Investment by the big four global diversified miners (BHP Billiton, Rio Tinto, Anglo American and Glencore) fell across all commodities from $55.8bn in 2012, and $52.4bn in 2013, to an estimated $26.0bn in 2015 and is likely to be minimal in 2016, with a large part of this reduction affecting coal supplies. Additionally, other market developments could potentially accelerate the progress back to positive price trends.

Supply and demand rebalanced?
"Coal’s battle for the European and US markets has likely been lost, worn down by increasing environmental costs, government measures to move away from coal, and in the US at least, competition from cheap gas, but other markets continue to offer promise of further growth," Price said. "The future of coal is brighter than some people think" he added.
Despite setbacks in 2015, India’s plans to expand its coal-fired power station fleet will reinforce its status as the world’s leading market for internationally traded coal. Reflecting its COP21 commitments, India has all but doubled taxes on coal purchases. The flat-rate tax is structured in such a way as to drive India’s coal consumers to buy higher-quality coal, which points to growth in coal imports.
IHS Energy expects an additional 50 million tonnes/year (mt/y) of import demand to emerge in the steam coal market between now and 2020, above 2015’s 905 mt.
In China, IHS projects a recovering economy will rebalance steam coal supply and demand, and any further measures to contain production beyond the 1 billion tonne/year (bnt/y) already announced could be a big positive for the international market.
Also huge supply cuts by Indonesia last year, estimated at 50-60 mt of exports, are also helping to rebalance the market, but further big cuts in Indonesian supplies are a strong possibility.
Moreover, the US is closer to balancing internal supply and demand for steam coal than it has been since the onset of the shale gas revolution in 2008. While this US rebalancing is unlikely to generate a significant rise is US import demand, it does reduce the uncertainty about excess US output being pushed into export markets.