Declining mining investments in Asia will push coal prices up

The value of coal mining in China fell 50%, dampening the appetite for investment.

Falling mining investments paired with rising demand will push coal prices up in the long term, Fitch Ratings said in a report.

In China, the value of coal mining dropped by 50% to $55.5b (CNY256b) by 2017. The decline in the industry from 2013 to 2016 has dampened mining firms’ appetite for investment, specifically those in low-margin ventures, Fitch reported.

Environmental concerns related to coal mining have also affected investors’ funding options, according to the agency. Falling coal mining investment despite the rise in production suggests a less downbeat for coal prices in the long-term, Fitch said.

“Banks' increasing reluctance to fund fossil-fuel projects is likely to be a constraint on any recovery in coal investment,” Fitch said. “Financing for low-grade, greenfield mines, in particular, is becoming more costly and difficult to obtain, whilst small, inefficient and environmentally non-compliant coal companies are finding it harder to secure loans.”

With this, mining companies in the region can expect less margin pressure compared to Fitch’s previous price assumptions. Along with lower capital expenditure (capex), Fitch said that the margin pressure could support deleveraging.

However, companies should watch out for constraints that can affect the generation of new revenue streams refinancing risks may come up for smaller miners.

In 2017, Chinese coal output reached 3.4 billion tonnes. By 2018, the government directed producers to raise output 3.7 billion tonnes in order to support power providers. Meanwhile, coal exports by Indonesia rose by 13% during the first quarter if 2018. Fitch said that the numbers are “likely to increase further as producers respond to high margins.”

Despite the rise in production, falling coal mining investment suggests a less downbeat for coal prices in the long-term, Fitch said.

In Indonesia’s case, Fitch said that policies could hold back regional supply in order to limit coal imports as the world’s biggest exporter is looking into meeting the 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,” the agency explained.

“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,” Fitch added.

According to Fitch, new coal-fired power plants in developing countries of 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,” Fitch said.