Thermal coal, long the pow­er behind China’s industrial activity, is in the doldrums.

Since reaching more than $130 a tonne in 2011, thermal coal has dropped almost 50pc and is trading at levels last seen in 2009 when China, historically a net exporter, started to import large quantities of the combustible rock to meet domestic demand.

That recent poor performance has prompted a growing number of analysts and traders to ask if thermal coal prices are close to bottoming, particularly as Chinese demand picks up later this year.

Some ask if steep drop means bottom has been reached, but few expect a V-shaped recovery

“If there is any commodity that is currently trading at the bottom of the cycle, it is coal,” says Paul Gait, analyst at Bernstein Research. “For those looking for undervalued mining assets, it is hard to believe there is a better commodity on offer currently.”

Yet few market participants believe there will be a V-shaped recovery in prices, which recently sank below $70 a tonne in Australia and South Africa. Thermal coal faces oversupply challenges and a structural decline in demand brought on by decarbonisation and competition from more environmentally friendly sources of energy.

Coal makes up a large share of production for global mining houses such as Glencore and Rio Tinto, for which a recovery in prices would provide a big boost to profitability.

But three global benchmarks — in Europe, South Africa and Australia — have fallen between 12 and 21pc this year. While that is a better performance than iron ore, which has dropped almost 30pc so far this year, it follows steep dec­lines in the past three years.

“We are still adding capacity in the midst of a greatly oversupplied market,” says Andy Roberts, principal analyst for thermal coal research at Wood Mackenzie, a consultancy. “That’s part of what has driven prices especially low.”

In response to lower prices, Russian authorities have thrown loss-making producers a lifeline by reducing rail tariffs, while miners in top exporting countries such as Indonesia and Australia have ramped up volumes and cut costs.

May 2014: Sitting at the heart of West Virginia’s economy, the coal industry says its future is under threat Although supply growth is slowing — slightly more than 46m tonnes were added in 2013 compared with 80m tonnes a year earlier — Macquarie, an investment bank, estimates a further 30m tonnes of seaborne thermal coal will still be added to the market this year, and the same amount in 2015. It is not until 2016 that supply falls to 20m tonnes.

The glut of seaborne supply, a hangover from the 2009 price boom, is being felt across the globe including China. Benchmark domestic prices have fallen more than 25pc in 2014 and recently hit a seven-year low of Rmb480 a tonne. Price cuts by the country’s largest producer, Shenhua, were followed by other large producers to clear out excess inventories.

Stefan Ljubisavljevic, an analyst at Macquarie, expects domestic Chinese prices to strengthen in the coming months as inventories are cleared out, industrial activity picks up and hydroelectric power generation tails off. This, and restocking in India, should help seaborne prices rally in the fourth quarter.

He and others expect a further recovery in prices over the medium term as supply growth starts to slow, and demand, which is forecast to grow rapidly in India and southeast Asia, catches up.

“Demand is beautiful, it’s growing 8pc every year, but the problem is we are oversupplied,” says one senior trading house executive. “And who oversupplied? Indonesia. The mom­ent they can’t throw an extra 30m tonnes on the market, thermal coal turns big time.”

But while reduced spending, a slowdown in Indonesian output and a dearth of new projects will see the market return to equilibrium, few think prices will return to 2011 levels.

“The problem, and why we won’t get a V-shaped recovery in prices, is that demand is structurally under pressure,” says Ivan Szpakowski, an analyst at Citi. “That’s something we don’t think is going to change whether you wait two, five or 10 years.”

Mr Szpakowski says environmental pressures on coal consumption are rising not only in Europe and North America but also Asia. The most significant change has been in China, where the government is aggressively pursuing an ‘anything but coal’ development plan for the power sector, he adds.

Published in Dawn, Economic & Business, August 25th, 2014