Colombia: the Wild Card in Asian Coal Prices

There are several reasons why coal prices in Asia are unlikely to rally much in the coming years, but the most compelling one is also likely one of the most obscure: Colombia.

Why should a South American country that hasn't exported much coal to Asia recently provide the cap for prices?

Because as soon as Asian coal prices rise to a level that would make sense for Colombian miners to resume exports, they will, and they have as much as 25 million tonnes of spare capacity in their production and export chain.

It's true that Colombia and other producers in the Americas, such as the United States and Canada, have been largely forced out of the world's biggest coal market by the relentless decline in prices.

But while U.S. and Canadian miners may struggle to resume exports to Asia even if prices do recover, given they have been closing pits, their Colombian counterparts are largely ready to increase output.

The only thorn in their side is a battle over noise with residents that has restricted volumes on the Fenoco rail line linking the main mining region with ports, and put a question mark over the building of a duplicate track.

But the problem doesn't seem intractable and given the support of the Colombian government, it's likely that a deal will be worked out to allow increased capacity on the railway.

Even without the expansion, Colombia, the world's fourth-largest coal exporter, still has the ability to supply millions of tonnes to seaborne markets.

At what price can Colombian coal reasonably expect to return to Asia?

Certainly the current $51.84 a tonne for thermal coal at Australia's Newcastle Port is unlikely to be high enough to make economic sense.

But it's also likely that the price Colombia coal can make sense is lower than the $90 a tonne that prevailed in 2012, the last time significant volumes of fuel from the South American country made the long journey around the bottom of Africa to Asia.

China, the world's top coal importer, hasn't bought any Colombian coal so far this year, and imports in 2014 dropped 79 percent from 2013 to just 105,666 tonnes, according to customs data.

This is well down from levels seen in 2012, with the record monthly volume from Colombia standing at 860,844 tonnes in July of that year. <COA-COCN-IMP>

BIGGER CURRENCY BOOST
Since 2012, the main miners in Colombia, the joint venture Cerrejon, U.S.-headquartered Drummond and Murray Energy have worked at reducing costs, a common theme among beleaguered coal miners worldwide.

But they have also been helped by a sharp decline in the value of the Colombian peso, which has dropped about 66 percent since the start of 2013 to 2,919.42 to the U.S. dollar as of the close on Oct. 28.

In contrast, the Australian dollar has declined by about 32 percent over the same period, and the Indonesian rupiah by about 41 percent.

This means Colombian miners have received a significantly bigger boost from currency depreciation than their counterparts in Indonesia and Australia, the world's two biggest coal exporters.

Add to this still depressed prices for bulk carriers and the price at which Colombian exports could again make sense in Asia drops somewhere closer to $60-$65 a tonne.

Assuming Newcastle coal prices could reach that point, either through output cuts in Indonesia and Australia, or less likely through a demand-led revival, and it becomes a virtual certainty that traders will seek to move Colombian coal to Asia.

Strong arguments can be made that coal's outlook in Asia is grim, including China's slowing economic growth and determination to move away from the polluting fuel, questions about the strength of Indian import demand as domestic output grows and the increasing competitiveness of liquefied natural gas (LNGLF) as a wave of new supply starts to hit the market.

While all of these are valid arguments, they aren't quite as definitive as having a producer with millions of tonnes of capacity ready to roll as soon as prices stage even a modest rally.

By Clyde Russell