Falling mining investment lending support to Asian coal prices: Fitch

The long-term outlook for Asian thermal coal prices is improving, amid rising regional demand and falling mining investment, ratings agency Fitch Ratings said in its report. “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,” it said.

However, there are more constraints on their ability to generate new revenue streams, while refinancing risks might also rise for smaller miners.

The current coal price of over $100 a tonne for Newcastle 6,000 kcal – close to a five-year high – looks unsustainable, given the rising supply in China and Indonesia. Chinese production increased by 3 per cent 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 per cent on a year-on-year basis in the first quarter of 2018 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 per cent to 265 billion renminbi 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, according to Fitch.