Fitch: Falling Coal Investment to Support Asian Prices

The long-term outlook for the Asian thermal coal prices is improving, amid rising regional demand and falling mining investment, which partly reflects tighter environmental policies at banks, says Fitch Ratings. Mining companies in the region are likely to face less margin pressure than under our previous price assumptions, which, along with lower capex, could support deleveraging. However, there are more constraints on their ability to generate new revenue streams, while refinancing risks may also rise for smaller miners.

The current coal price of over USD100/tonne for Newcastle 6,000kcal - close to a five-year high - looks unsustainable, given rising supply in China and Indonesia. Chinese production increased by 3% to 3.4 billion tonnes in 2017, and the government has issued guidance to producers to increase output to 3.7 billion tonnes in 2018 to support power providers. Indonesian coal exports rose by 13% yoy in 1Q18 and are likely to increase further as producers respond to high margins.

 

However, falling coal mining investment suggests the long-term outlook for coal prices has turned less downbeat. The prolonged industry downturn from 2013 to 2016 has dampened mining firms' appetite for investment, particularly in low-margin ventures, while growing environmental concerns are affecting their funding options. Fixed-asset investment in Chinese coal mining, for example, dropped by 50% to CNY265 billion in 2017.

Banks' increasing reluctance to fund fossil-fuel projects is likely to be a constraint on any recovery in coal investment. Many global and regional banks have toughened their stance on lending for coal mining, reflecting concerns about climate change and, in some cases, pressure from environmental groups. Financing for low-grade, greenfield mines, in particular, is becoming more costly and difficult to obtain, while small, inefficient and environmentally non-compliant coal companies are finding it harder to secure loans.

Regional supply could also be held back by policies in Indonesia - the world's biggest coal exporter - that will limit the amount of coal that leaves the country, as the government looks to meet growing domestic power demand. These policies have not had much impact on coal exports in recent years, as domestic demand failed to meet the government's expectation due to completion delays in power projects, but export curbs could start to bite as the state power company Perusahaan Listrik Negara and independent power producers add coal-fired capacity over the medium term.

Meanwhile, the commissioning of new coal-fired power plants elsewhere in emerging Asia will partly make up for declining Chinese imports. In many of these countries, electricity needs are more pressing than environmental concerns, so power plants have not faced the same financing challenges as mining projects.

Fitch's latest coal price assumptions, published in May 2018, have long-term prices of USD75/tonne for Newcastle 6,000kcal/kg grade coal beyond 2020, compared with our price assumption of USD67/tonne set in October 2017. We do not expect rating actions in Asia-Pacific following these revisions, as ratings of most Fitch-rated Indonesian coal miners are capped by their small scale, while ratings of Chinese miners are capped by the credit profiles of their parents.

Powered by Capital Market - Live News