Higher coal prices in 2016? Don’t bet on it

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Store Norske and the Norwegian government are betting heavily on coal prices rising next year, but don’t expect your broker to advise doing the same.

Coal prices might recover from a worldwide slump, but there’s sharp disagreement about whether it may take one year or many for that to start happening. Numerous reasons for a lengthy low-price trend are cited, including cheap alternative energy sources such as natural gas, increasing production from suppliers in other parts of the world and many countries – including Norway, except for its stance regarding Svalbard – shunning coal because of its environmental impacts.

The brokerage firm Morgan Stanley, in a recent global analysis of energy commodities, forecast a three percent drop in energy coal prices and a 16 percent drop in metallurgical coal prices for 2015.

“At times, weight on (metallurgical) coal prices can be attributed to the commodity being mistakenly painted with the same brush as thermal coal by traders and hedge fund managers. However, Morgan Stanley sees the collapse in crude oil prices, a falling Australian dollar and weak import demand from China as the drivers behind met coal price weakness at the moment.”

It’s possible the worldwide decline in coal prices will halt, or even tick slightly upward, by the end of 2016, according to several other brokerages in Europe, the United States and Asia. But many others analysts inside and outside the mining industry are predicting a long-term slump.

“In coal we have to be ready that we have multiple years, it could be even three or four years, before we see an inflection point,” said Jean-Sébastien Jacques, recently named head of the Rio Tinto mining company in Australia , in an interview with The Australian Financial Review. “There will be volatility, don’t get me wrong; but where you say, ‘Well there is a real step change’ – that won’t be in the short term.”

Metallurgical coal is of particular interest to Store Norske because it can sell for up to $15 a ton more than lower-quality energy coal. That happens to be the amount the Svalbard mining company needs to operate on a break-even basis, since the company is basing a restructuring plan on prices of $75 dollars a ton and current energy coal prices are at about $60 a ton.

The higher quality coal has been discovered in the Lunckefjell mine that opened last year, but challenges remain in extracting and finding buyers, even without taking the company’s perilous financial health into account.

Norway’s Ministry of Trade, Finance and Industry submitted a bill to Parliament earlier this month requesting a 500-million-kroner bailout package that will allow Store Norske to continue operating through the end of 2016. The bill also notes the company faces a halt in its mining operations if it cannot sell coal at higher price by that time.

But Arlid Olsen, the union steward for Store Norske’s employees, told FriFagbevegelse further cost-cutting measures can also be pursued to help mining continue.

“We have a huge untapped potential in bringing down absenteeism and accident statistics,” he said. “By hard work and close collaboration we will achieve this. And then will we be able to avoid going further on (cuts to) employee conditions and wages.”

Store Norske laid off about 100 of its 340 employees earlier this year as part of the company’s restructuring efforts, which also include scaling back operations, renogetiating agreements with subconstractors of refinancing bank debt.

Wenche Ravlo, who become Store Norske’s new administrative director in February, was selected because of her exerpeince managing similar financial crises elsewhere, according to a statement by the board of directors at the time. Among the efforts initially winning praise was prolonging a 135-year-old paper mill operated by Norske Skog in Ringerike by laying off 70 of its 400 employees.

As with Store Norske, Ravlo expressed hope at the time about Norske Skog finding new markets and saving costs through improved efficiency. But she departed her job as manager of the plant in 2009 to become the manager of a Norske Skog factory in Australia and the paper mill, unable to overcome its struggles, closed in 2012.But while numerous mining companies across the Arctic are facing perilous futures, one factor in Store Norske’s favor is the Norwegian government’s determination to preserve a strong economy and community in Svalbard due to its value strategical asset as nations are increasingly battling for footholds in the far north. Military and commercial activities by Russia in particular are of concern and, while Svalbard Gov. Odd Olsen Ingerø is among the leaders saying a serious challenge of Norway’s sovereignty over the archipelago is unlikely, the heightened tensions have prompted some local residents to making joking comments to the media such as “Putin is our best friend.”