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Are we in an era of commodity producers market vandalism? Commodity billionaire Andrew “Twiggy” Forrest thinks so and it’s hard not to agree with him.

The price of metallurgical coal continues to fall in response to the industry’s overcapacity with the last quarterly settlement price of $89 a metric ton, another 4.3% drop from the previous quarter. The price of met coal is now at the lowest level since March of 2005, ​ Bloomberg reports.

Justin Farr-Jones Energy

Many of us recall the boom days of 2011 when the metallurgical coal reached its peak, at $330 a metric ton, as a result of supply disruptions in Queensland, Australia, and China’s seemingly unlimited demand for steel related commodities.

To take advantage of the higher prices in 2011, the major mining companies almost without exception convinced themselves the ‘boom’ was the new normal and increased their capital expenditure, coal output and infrastructure capacity. This capital “indiscipline” plays out with a considerable time lag as projects tend to be multi-year phases and has today created a supply glut whilst the seaborne coal demand from China has collapsed and the global economy slowed.

Australia’s market dominance stems from the fact that it is the largest exporter into the global seaborne market for metallurgical coal.  The Australian response to the crisis thus far has been to increase production (reduce unit costs per ton) and take market share, notably from the U.S. producers, whilst also attempting to kill off the new threat from emerging market coal basins in Mozambique and Mongolia. This has been largely successful with the U.S. producers suffering record losses, whilst the their domestic markets are saturated by cheap and cleaner gas alternatives.

Andrew ‘Twiggy’ Forrest, the billionaire Chairman of Fortescue Metal Group, has called this “an act of market vandalism” by the largest mining houses in the race to the bottom.  Forrest says the iron ore market “is inelastic in demand.. so any further product offering will see the price collapse” and the same logic has applied to metallurgical coal thus far.

For African coal in the Mozambique basin, the only projects that are progressing are those backed by sovereign states, Vale (Brazil) and ICVL (India).  State owned Brazilian miner Vale SA has needed to replenish its finances by selling 35% of its logistics and 15% of the Moatize mine to Japan’s Mitsui.  That transaction in December 2014 ensured financial stability and that Vale could take a long term view of the project and increase production from 5 mt to 22.5 mt by 2017.  Vale will likely only break even at current prices even producing 22.5 mt.  Vale is persevering, partly because its already spent $4 billion to date but more important its production costs will be first quartile and competitive globally, pushing out higher cost producers from the market.  And so the ‘market vandalism’ by the mining “majors” goes on.

After the decade long boom, the bust is also likely to be 5 years or more in duration.  This is a high stakes game where those carrying excessive debt will be downgraded and eventually shut off from capital markets.  The industry is locked into a war of attrition and a spate of mergers, restructuring and consolidation is inevitable.  It has been brutal for the junior miners, who have mostly been put out of business, but now the major mining groups and headed for the end result. Despite the 20% rebound in Glencore’s share price this week, shareholders would be advised not to think the worst is over just yet for the mining houses and traders.