London, England — 26 July 2012 – Global coal output is set to shrink over the next year or two as miners grapple with a combination of low prices driven by cheaper alternatives, weak demand, and cost and currency headwinds.

Reuters reports that output has already begun to fall, but so far only by a couple of millions tonnes “’ a tiny fraction of the global annual seaborne coal trade of 750Mt. Analysts and industry executives say cuts could soon reach dozens of millions of tonnes to bring supply in line with weaker demand in China and Europe.

The United States is already cutting due to low prices and competition with cheap shale gas, while high-cost Russian and Australian miners are also trimming production, and even lower-cost rivals could follow suit due to high labour costs and strong local currencies.

It could take a couple of years for the market to find a balance, prolonging a period of painfully low profits for higher-cost miners while helping out utilities, steel firms and cement makers with low input prices.

“The current oversupply predicates production cutbacks and the delay or cancellation of expansion plans,” Bank of America Merrill Lynch said this month. “Although we expect the surplus to shrink in 2013, it will not disappear,” it added.

Coal, particularly thermal coal for power generation, is the second biggest dry bulk commodity market in the world by trade volumes, but its illiquid spot market is prone to price booms and busts.

Prices peaked at over US$200/t before the 2008 financial crisis, then fell sharply with other commodities before stabilising for the next few years at around US$100 to US$125 due to booming Chinese demand.

During the latter period, miners almost everywhere in the world ramped up coal output on the assumption that China, and to a lesser extent India, would absorb it all without depressing prices. But they hadn’t reckoned on booming U.S. shale gas production and a slowing of Chinese demand.

U.S. domestic coal prices have fallen much faster and more steeply than global prices, according to Reuters data. U.S. miner Patriot Coal filed for Chapter 11 bankruptcy protection this month.

China produces half the global annual coal output of 4 billion tonnes and also imports large volumes from Australia, Indonesia, South Africa, Russia and Columbia. The United States produces 550 million a year and has also emerged as a big exporter because of the shale gas boom.

Outside the United States, coal prices have stabilised at around US$85 per tonne since May, but the real problem is that this price is already below cost for some producers.

“If prices stay at US$85, then much more coal will have to fall out. In the next couple of months, I think you will see 15 to 20 million tonnes will have to drop globally,” an Indonesian producer said.

Source: Reuters Africa. For more information, click here.