OREANDA-NEWS. Thermal coal prices are expected to remain at relatively low levels during the next couple of years because of oversupply and the shift towards cleaner energy sources, the Reserve Bank of Australia (RBA) said.

At current prices a significant share of seaborne thermal coal supplies are unlikely to recover their costs of production, the RBA said in its June quarterly 2015 economic update. Australia is the second-largest seaborne exporter of thermal coal after Indonesia.

Argus last assessed 6,000 kcal Newcastle fob 90-day prices at \$59.14/t, down by 18pc over the past 12 months and down by 57pc from its peak of \$137/t in January 2011. Current prices are above a five-year low of around \$55.25/t reached in April.

But there have been few closures of Australian mines despite the prime slump and most producers have continued to focus on cutting costs and improving efficiency, the RBA said.

The limited response of Australian supplies so far reflects several factors, including Australian coal producers being effective at reducing expenses in labour, fuel and maintenance expenses. But take-or-pay transport contracts may limit the supply response for some Australian mines, the RBA said. Take-or-pay contracts involve mining firms buying a fixed amount of transport capacity that they must pay for, regardless of if they use the capacity or not.

The depreciation of the Australian dollar has offset some of the impact of falling prices for Australian producers, but the exchange rates of other major coal exporters have also depreciated since 2011, the bank said.

The pace of expansion in global seaborne thermal coal supplies is expected to slow during the next few years, as existing investment projects reach completion and there are few plans to commit to new projects, the RBA said. The fall in thermal coal prices may prompt a reduction in existing supplies from higher cost producers, it said.

The extent of any additional mine closures and the level of exports will depend on the ability of Australian producers to continue to reduce costs relative to international competitors, the bank said. "Nevertheless, the rate of cost reductions is likely to slow as the easiest measures are exhausted."