One Goldman Sachs chart shows that India won’t save the coal industry
It’s time to face reality — Professor Ross Garnaut got it right and everyone else got it wrong when he warned that China’s demand for commodities was about to tail off imminently, not in a decade’s time. Steadily the commodity forecasters have come round to Garnaut’s point of view, but our new Energy and Resources Minister, Josh Frydenberg, in conjunction with the Minerals Council, seems to still be in denial.
Yesterday, we reported that ANZ Bank had revised its expectations of when Chinese steel demand (with flow-on effects for Australia’s iron ore and metallurgical coal) would peak from their last forecast of the year 2020, to now declaring it happened last year. And now Goldman Sachs commodity analysts Christian Lelong and Amber Cai have delivered a very grim forecast indeed for thermal coal producers.
Declaring “peak coal is coming sooner than expected,” they have downgraded their long term forecast for thermal coal by 23 per cent from $US65 per tonne ex Newcastle, to $US50. They note this is necessary to “reflect what we see as the remote likelihood that the market will tighten ever again”. The dire problem facing coal producers focused on the seaborne coal market, such as Australia, is pretty much summed up in the chart below.
Between 2009 and 2014 things were fantastic with substantial growth. It was then expected that even if China’s demand growth slowed, rapid growth of Indian demand would keep the party going. Unfortunately, growth in China’s demand isn’t slowing so much as going into reverse. This reversal, combined with overall declines in demand in the rest of world, will outweigh growth in demand from India. Consequently, coal demand in 2019 will be less than it is today.
Global thermal coal demand growth by region – billion tonnes
With this in mind, it leads one to wonder what on earth is going on in Canberra. When asked by Fairfax’s Lisa Cox whether Energy and Resources Minister Frydenberg would consider using the government’s $5 billion Northern Australia Development slush fund to bankroll a rail line to the Galilee Basin coal mines such as Adani’s Carmichael, he said: “Yes, if there is a good case and state governments are willing to step up, then you would think that rail is one of the areas where it will go.”
Yet the Goldman Sachs analysts conclude: “The industry does not require new investment given the ability of existing assets to satisfy flat demand, so prices will remain under pressure as the deflationary cycle continues.” They also note the private sector has concluded that you’d be throwing your money down the drain investing in new coal mines, stating: “In any case, capital markets are largely closed [for funding coal mines] with the exception of private equity investors on the hunt for distressed assets.”
In light of this, if the government chose to sink several billion dollars of taxpayers’ money into bankrolling Adani’s coal mine (for whom rather intriguingly the recently elected Federal National Party president worked for as a lobbyist) or the other coal mine in the region developed by Gina Rinehart, it would probably come at the expense of reduced volume and prices for Australia’s other coal mines. Even if you couldn’t give two hoots about climate change, does that sound like a sensible use of taxpayers’ money to you?