Since peaking in January 2011, the price of thermal coal has fallen 51% (Chart 1). Like any commodity, price is driven by the simple dynamics of supply and demand and supply has clearly continued to outpace demand (Chart 2). We highlight nine reasons for this imbalance and suggest some of these factors are secular as opposed to normal cyclicality.
1. Global production is not coming off-line fast enough. As is the case in Australia where approximately 40% of all seaborne coal is unprofitable, producers are forced to keep selling at a loss in order to fulfil previous shipping commitments. This is an unfortunate position for producers but will ultimately correct itself once they run out of money or demand picks up.
2. Japan has ramped up consumption (which is actually supportive of prices) but this is only transitional demand until it restarts more nuclear power plants and builds out the 65 gigawatts of solar they have approved over the past two years – incidentally this is greater than Australia’s total installed capacity of all types of power.