The full effect of the coronavirus on the global economy is still uncertain. However, the devastation of demand has already become apparent, with sea-borne thermal and metallurgical prices in near-free fall. So, what does this mean for global marine supply? And how are different regions going to be affected?
This article is an excerpt from our analysis 'Spot prices put 36% of seaborne production at risk.' Fill in the form for a free copy of the 20-page perspective, or read it for some of the highlights.
Quantifying the effect on marine supply
Our work looked at the relative risk of output reduction and identified three risk categories:
High risk – transactions with a negative spot margin and either a positive or a negative rating.
Small risk – transactions with a positive margin but with a negative valuation.
Low risk – transactions with a positive margin and a positive valuation.
The results are very strong. More than a third of the marine coal market is currently at high risk of production cuts.
Thermal coal: collapsing prices take their margins
It may come as no surprise that the hard-hit thermal coal market accounts for 93% or more than 440 million tons of high-risk production. As it stands, almost 45 per cent of production would have a negative cash margin if sold at spot prices.
Some thermal coal is at risk in all producing countries. Indonesia has the highest risk tonnage, although the entire Atlantic basin is struggling.
In Indonesia, weak demand from China and domestic oversupply are creating considerable pressure and a high likelihood of production cuts. Low oil prices and the resulting fall in diesel are in its favour – but exchange-rate movements offer little help as most of the costs are in US dollars.
Australia is best placed to weather the storm. Costs versus quality of coal have always been among the best in the world, and exchange-rate fluctuations have only enhanced that position. As a result , we expect Australia to remain a key global supplier of energy, irrespective of rising demand. Some cuts may occur but will be limited due to high fixed costs related to take-or - pay contracts.
What is the situation in Russia, Colombia – and the rest of the world? Please fill in the form at the top of this page to read this in full.
Seaborne metallurgical coal has saved the collapse – for now.
The metallurgical industry – with prices dropping but not yet at record lows – represents just 7% of high-risk demand, or some 33 million tonnes. Approximately 10% of metallurgical output has a negative cash margin.
The US is struggling at current spot prices, and the high cost of its producers means that production cuts are coming. Small producers are likely to fall quickly and quietly, with larger operations announcing reductions.
In Canada, on the other hand, production is at low risk of being reduced. Canadian producers are positioned almost as well as high-quality Australian operations. Lower quality and smaller operations are more at risk than large flagship operations – even although there is a possibility for some production reduction if prices continue to decline, tonnage is likely to be smaller than other countries.
For our full country-by-country analysis, please fill in the form at the top of this page for a complimentary copy of the 'Spot prices put 36% of seaborne production at risk.'
