Glencore freezing $6bn project may be just the start as thermal coal price drops near 3-year low


Funding for coal projects from miners and governments are drying up

Glencore Xstrata has put on hold its massive $6 billion Wandoan thermal coal project in Australia because of coal market prices approaching three-year lows.

The proposed 30 million tonnes per year project in the state of Queensland was among several greenfield operations the Swiss-based have put on ice around the world.

The newly-merged company is the dominant force in the global thermal coal trade – Xstrata was the number one exporter of thermal coal and Glencore controlled large parts of the global marketing and distribution of the the commodity.

Glencore Xstrata CEO, Ivan Glasenberg, promised as much as $2 billion in cost-savings as a result of the merger at the same time as the Wandoan announcement.

Convincing shareholders the merger was worth it and will deliver cost cuts would've played a part in the decision to freeze the project.

But given Glencore Xstrata central role in the coal world it probably says more about just how negative a view the company is taking of the long-term prospects for thermal.

Unlike coking coal where few new projects are likely to come on stream and demand is strengthening, coal for power generation is suffering from global oversupply.

The metallurgical coal price has recovered from steep declines during the first half of 2013 to trade for over $150 a tonne (premium Australian coking coal), up from multi-year lows struck in early July of $130 at tonne.

The slump in thermal coal prices have continued unabated however with fourth quarter FOB Australia Newcastle falling through $80 a tonne for the first time since October 2009 and down from around $100 at the start of the year.

It's not just the miners that are rethinking coal projects. The US Export-Import Bank, the World Bank and the European Investment Bank have all pledged to stop funding coal projects abroad.

These institutions have provided more than $10 billion in financing for coal-fired power plants in developing nations including South Africa and India since 2008.