Weak oil to reduce coal production costs – sources

Falling crude oil prices have been low enough to reduce production costs of global coal miners and this could put further downward pressure on physical coal export prices, analysts and traders said.

Brent crude oil futures have dropped by 52% to $55/brl in March from $115/brl in June 2014. Over the short-term lower oil prices are reducing the cost base of miners.

A recent research note by Deutsche Bank said oil prices have been low enough for long enough that it seems likely that this will translate into some cost benefits for coal producers. Fuel and other petroleum-related inputs reportedly account for as much as 40% of mining costs.

Continued oil price weakness and strength in the US dollar would support lower coal prices, coal analysts have suggested.

“A continued decline of oil prices would hurt coal prices given that in a sharply decreasing price environment the relationship between coal and oil prices has been shown to strengthen,” said a European coal market source.

Australian coal miners are already under pressure from a slowdown in sales to their traditional major markets in Asia mainly China, Japan and South Korea.

Thermal coal exports from two terminals at the Australian Port of Newcastle to China, the world’s largest importer of coal, dropped 31% month on month to 1.4m tonnes in February, according to data from Port Waratah Coal Services (PWCS), which operates two of the port’s three coal export terminals.

South African coal miners have been struggling to secure deals to the export market due to slow demand and expectations of lower prices so as a result sales have been few and far between, physical coal traders said.

Last week, two FOB Richards Bay coal cargoes changed hands, as reported by brokerage globalCoal, compared to nine cargoes during the first week in January, ICIS data shows.

Consumers are aware that oil prices have fallen and they expect the lower costs to result in lower prices and this has resulted in some buyers sitting on the side-lines waiting for reduced prices, physical coal traders said. Stacy Irish