The Coming Coal Glut

Keith Kohl

Written By Keith Kohl

Posted May 12, 2014

A new coal mine will be opening in Queensland, Australia, as the government has just given approval for the construction of railway, port, and mining infrastructure.

Indian company Adani Enterprises will open the Carmichael mine with expectations that it will be one of the biggest in the world: producing 60 million tonnes per year at full capacity.

As you may know, Australia is normally the world’s largest coal exporter, which means the Carmichael mine will add an astounding amount of coal to world supply once operational.

But will there be a glut? And will this mine lead to a significant drop in prices?

The immediate answer is no, and here’s why…

To start, Adani will need several years to develop the railways and port expansion before it begins digging up 60 million tonnes of coal each year.

Maybe once they hit full capacity and start exporting their reserves, we will see a drop in coal prices, but it’s no guarantee.

Thing is, Adani will ship most of its coal from the Carmichael mine to India, which will be glad to have it to help expand the burgeoning economy.

And compared to the other large coal mines of the world, I don’t see it impacting the prices for their coal.

The Haerwusu and Hei Dai Gou in China both serve Chinese utilities and manufacturers and will likely not see any of the Australian product.

Also, the Black Thunder and North Antelope Rochelle in Wyoming, which produce nearly 200 million tonnes per year combined, will not see a significant price crunch since most of their product is used by U.S. utilities.

The one large mine that could take a hit is the Moatize in Mozambique. Operated by Vale (NYSE: VALE), the mine ships roughly 11 million tonnes per year to Asia, Europe, the Americas, and India.

Vale could lose a significant chunk of its Indian market once the Carmichael mine opens, and hopefully it’ll be able to adjust by then.

Even though the process to open the mine will take several years, there is one scenario that could affect U.S. coal miners like Peabody Energy (NYSE: BTU)…

As the U.S. ramps up efforts to be more energy efficient, and with the resurgence of U.S. natural gas, we could see coal producers lose a large portion of the U.S. market and have to export more coal to maintain the bottom line.

At this point, U.S. coal producers could suffer from the added capacity from the Carmichael mine.

Moreover, as demand for emerging economies grows, there’s no telling how much the price for a ton of coal — currently around $65 — would dip given population and manufacturing growth in India, China, and South America.

Until next time,

Keith Kohl

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