Deal and no deal. The board of Gloucester Coal has recommended its merger with the Australian arm of China’s Yanzhou. Just last week, though, fellow Australian coal miner New Hope abandoned an auction after it could not find a buyer at a price it liked (A$6bn). Merger activity in the coal sector has been booming for two years, absent the monster Glencore/Xstrata deal. The question is whether the trend is running out of – well, steam.
The deals have been driven by China (what else?). Industry trends, meanwhile, are starting to turn. The price of thermal coal – used in power generation – has weakened. Australia’s benchmark Newcastle coal price has hit a near 15-month low. On a pure supply-and-demand basis, prices should slip further in the next two years. Global supply will grow by nearly 7 per cent a year this year and next but demand will grow by just over 2 per cent in both years, according to Standard Chartered. China’s own rising production should cap its overseas demand. It is not that simple, of course: should the renminbi rise, overseas coal would probably still be competitive. So the wave of mergers may not be over yet.
The $35bn of deals in 2010 were largely miners buying reserves, such as the A$2.2bn acquisition of Centennial by Banpu of Thailand. A $50bn string of deals in 2011 was led by more strategic buyers, such as India’s Lanco buying Griffin, in a bid to secure supplies. These acquirers are still there: demand for thermal coal is expected to grow by about 4 per cent a year in China and 15 per cent in India for the next two years. The Gloucester/Yanzhou merger, which still has some hurdles to pass, fits this pattern.