European Coal Price Falls to Seven-Year Low as Costs And Demand Drop

European coal prices fell to the lowest in at least seven years as the cost of mining and shipping the fuel dropped and demand from China is forecast to decline.

Benchmark year-ahead thermal coal lost 1 percent to the lowest since September 2007. Prices for coal in Australia and South Africa, two of the world’s five biggest steam coal exporters, have dropped to five-year lows in the past two weeks.

Crude oil’s 44 percent slump this year and the depreciation of currencies in countries including Australia and Indonesia relative to the U.S. dollar contributed to lower production costs for miners. As coal is traded in dollars, producers have gained some protection from the declining market price, according to the International Energy Agency.

“This low price is mostly based on lower cash costs, currency and oil prices, which are lowering the floor for producers,” an analyst in Oslo at Nena AS, said yesterday by phone. Cheaper freight “lowers the voyage cost and means a lower price delivered into Europe.”

Next-year European coal has slumped 22 percent this year (2014) to $67.70 a metric ton in London today, according to broker data. The contract had its biggest weekly fall in more than two years.

China Demand

Demand from China may drop almost 10% next year as new regulations governing coal quality come into effect on Jan. 1, according to Deutsche Bank AG.

“Increases in domestic coal consumption are more likely to be satisfied by domestic production rather than imports,” an analyst in London at Deutsche Bank, said in a Dec. 16 report. “We lower our assumptions for Chinese net thermal coal imports from 210 million tons in 2014 to 190 million tons in 2015.”

The global seaborne market moved from a shortfall to a surplus in 2014, and the excess supply is forecast to almost quadruple to 30 million tons in 2015 from 9 million tons in 2014, according to Deutsche Bank.

West Texas Intermediate crude traded as low as $53.60 a barrel on Dec. 16, from more than $70 at the end of November. A gauge of the U.S. dollar headed for its eighth weekly gain in the past nine weeks.

“Australian producers have seen almost no price decline in their currency; Colombian and South African producers the same,” the director of energy markets and security at the IEA, said on a conference call with reporters on Dec. 16. “Russian and Indonesian prices have actually increased in local currency.”

Coal’s decline comes even as Europe enters the winter season when demand for electricity to heat homes increases compared with summer. Coal-fired power generation in the U.K. peaked at 17,213 megawatts on Dec. 16, the highest within-day output since March 7, according to data from Elexon, a unit of the U.K.’s National Grid Plc.