LAUNCESTON, Australia: Australian and Indonesian coal miners, already battling weak prices, have potentially more to worry about with a possible El Nino weather event coming by year end, which may further erode profits.
This may sound counterintuitive, as El Nino normally brings dry weather to Australia and Southeast Asia, creating conditions ripe for boosting output, usually a good thing.
However, for the boost to production to add to profits there has to be enough demand to soak up the supply, and here El Nino is likely bad news as well.
China and Japan are the two major customers for Australian and Indonesian coal, and El Nino tends to result in warmer weather for the whole of Japan and the northern part of China.
If it does develop in time for the Northern Hemisphere winter, El Nino may trim heating demand and thus the need for coal-fired generation.
Australia's Bureau of Meteorology said this week that while the climate indicators for El Nino have eased slightly, they are still near the threshold. The weather pattern, caused by a warming of the sea-surface temperatures in the Pacific, also tends to bring heavy rain to southern China, with the last El Nino in early 2010 causing widespread flooding and loss of life.
However, it also ensures that the massive Three Gorges hydroelectric power plant, the world's largest, will have plenty of water to keep generation levels high, assuming related infrastructure remains undamaged.
Again, this may serve to cut thermal generation demand in the industrialized south of China.
China has recently been increasing its hydropower output at the expense of thermal generation, presumably as part of efforts to lower the carbon intensity of its economy.
Hydropower generation rose 19.4 percent in June and is up 9.9 percent in the first six months of the year over the same period in 2011, while thermal use dropped 4.2 percent in June and gained only 2.6 percent in the first half.
If China can use hydro and nuclear power instead of coal, it seems it will, a further concern for Asia's coal exporters.
While China's coal imports have ramped up in the first half of 2012, mainly in response to slumping global prices making foreign coal competitive with domestic supplies, this performance may not be repeated in the second half. Coal imports rose 19 percent in the first five months of the year, but the China Coal Association said on Thursday that lower consumption growth, rising domestic output, higher inventories and a cooling economy will limit demand for foreign supplies.
The association said consumption rose 5.6 percent in the first half to 1.91 billion tons, but stockpiles reached 276 million tons by the end of June, and those at major ports were 67 percent higher than a year ago.
It would appear that the Chinese market is well-supplied just at when Australian production is increasing, having recovered fully from the floods caused by La Nina at the end of 2010 and beginning of 2011.
La Nina is the opposite of El Nino insofar as it increases rain in Australia and Southeast Asia, and the last event caused widespread flooding of mines and damage to infrastructure.
Australia's exports of thermal coal are projected to rise to 179 million tons in the fiscal year to June 2013, up from 159 million tons in 2011-12 and 143 million tons in the flood-soaked 2010-11 year, according to the government's forecaster.
For coking coal, exports should rise to 161 million tons in 2012-13, up from 142 million in 2011-12 and 140 million in 2010-11.
It's worth noting that exports of coking coal, which was worse hit by the flooding in late 2010, will only this coming fiscal year surpass the 157 million tons of 2009-10.
However, in value terms, both the flood-impacted years of 2010-11 and 2011-12 are likely to have performed better than what's expected for 2012-13.
The value of exports for coking coal in 2010-11 was A$29.73 billion ($30.62 billion) and A$30.31 billion in 2011-12, and they should realize A$29.68 billion this year, the Bureau of Resource and Energy Economics says.
The price of coal at Australia's Newcastle port dropped in June to the lowest since January 2010 and has only recovered slightly to trade at $87.73 a ton in the week ending July 13.
It has fallen about 32 percent this year and is now close to the marginal cost of production for higher cost mines.
Rio Tinto said this week it would cut an unspecified number of jobs at its Clermont thermal coal mine in Australia as it battles low prices and rising labor and other costs.
It's unlikely that Rio Tinto will be the last coal miner to cut output, especially if an El Nino does happen.
— Clyde Russell is a Reuters market analyst. The views expressed are his own.
