Australian department of Industry, Innovation and Science has released its quarterly report on thermal coal market which provides an outlook for coal prices, demand and supply.
Some of the major take-away from the report on quarter ended on Sep’18 are elaborated below.
Australian Thermal Coal Market
>>Coal Prices set to be weighed down by softening demand
What Happened: The Newcastle benchmark spot price surged to a six-year high of over USD 120/MT in July, before softening as temperatures cooled and hydro output increased in China.
Nevertheless, demand from China and India have been robust, driven by strong power demand and constrained domestic thermal coal output.
The thermal coal spot price averaged an estimated USD 117/MT in the September quarter, up 13% on the quarter and 25% on the year.
The divergence between prices for higher and lower quality coal continued to grow in the September quarter, primarily driven by softening demand from China for lower energy content coal.
In Aug’18, it was confirmed that Glencore and several Japanese utilities settled the thermal coal contract for April 2018 to March 2019 at USD 110/MT, primarily initiated as a consequence of the abandoned negotiations between Glencore and Japan’s Tohoku Electric Power which had left Asian thermal coal market without an industry benchmark.
Contract prices continue to play a key role in thermal coal markets, as utilities attempt to reduce their exposure to volatile coal prices. An estimated 30-40% of Australian thermal coal is sold under term contracts, with the remainder sold on spot markets.
Recently, Glencore and Tohoku have reached an agreement on term supplies of coal, after the former appeared willing to compromise and dropped its asking price significantly.The two companies have settled at a fixed price of USD 109.77/MT for premium GAR 6322 kcal/kg Australian coal.
What May Happen: The Newcastle benchmark spot price is forecast to drift lower over the next two and a half years, from an average of USD 105/MT in CY18, to USD 84/MT in CY19 and USD 75/MT in CY20.
The forecast decline in the thermal coal price is underpinned by an expected softening in import demand, particularly as domestic supply picks up in China, and as nuclear reactors come back online in Japan and South Korea.
>>Australian thermal coal exports: Earnings to reach a record high in 2018-19
What Happened: High thermal coal prices have driven Australia’s export earnings to a record USD 23 Billion in 2017-18, an increase of 19% from the previous financial year. Over the same period, export volumes only grew marginally, by 0.4% to 203 MnT.
What May Happen: Australia’s thermal coal export earnings are forecast to grow by a further 13% to new record of USD 25 Billion in 2018-19.
Despite a forecast decline in spot prices, export earnings are expected to be supported by the high contract price settled for the 2018-19 Japanese fiscal year (March 2018 to April 2019).
Thermal coal export earnings are forecast to decline by 24% to USD 19 Billion in 2019-20, as both contract and spot prices decline.
Factors Supporting Australian Thermal Coal Market:
The impact of softer coal prices is likely to be offset by an increased in production and export volumes.
Growth in export volumes over the outlook period is expected to be supported by an easing of logistical constraints that affected exports in 2016-17, including congestion at ports, industrial action and rail maintenance.
The only substantial new addition to capacity over the outlook period is MACH Energy’s Mount Pleasant mine, which is expected to gradually ramp up to 7.5 MnT of output annually. Export growth will also be supported by planned expansions, most notably at Yancoal’s Moolarben mine, and productivity improvements across several operations.
Global Coal Market Watch:
World thermal coal markets have remained tight, as supply struggles to keep up with strong demand, particularly from China and India.
World trade in thermal coal is forecast to grow by 1.1% to 1.1 BnT in CY18.
Demand for thermal coal is expected to soften over the following two years, driving a modest decline in world thermal coal trade of 0.8 per cent to 1.09 BnT in CY19, and 1% to 1.08 BnT in CY20.
Import demand for thermal coal is expected to be weighed down by domestic coal supply picking up in China, nuclear reactors coming back online in Japan and South Korea, and developed countries continuing to shift away from coal-fired power generation, particularly in the European Union.
Modest demand growth from emerging economies, particularly India, is expected to cushion the decline.
On the other hand, Indonesia and Australia are expected to remain the largest and second largest exporters of thermal coal, respectively.
Below is the detailed outlook on how the global coal market would behave in the near future,
World Imports
>>China: Coal imports will continue to be driven by government policy
What Happened: China’s thermal coal imports surged by an estimated 21% over June and July, driven by a prolonged heat wave which increased air conditioning usage and pushed up electricity demand.
China’s thermal power output (mostly comprising of coal-fired power stations) grew by 6.2% Y-o-Y in the first half of 2018.
Country’s domestic coal output has also taken a hit during the period. In addition to the closure of 80 MnT of capacity in the year to July-as part of the annual target of 150 MnT, there have been renewed efforts to reduce pollution and improve mine safety.
What May Happen: China’s imports of thermal coal are subsequently forecast to decline over the remainder of the outlook period to 190 MnT in CY20.
Despite ongoing capacity cuts and output restrictions in domestic coal sector, the addition of new capacity is expected to result in a net increase in output over the following two years, and consequently reduce import demand.
China has large reserves of thermal coal, and in CY17, domestic production accounted for 86% of total thermal coal consumption. Another factor affecting China’s coal imports will be the growing consumption of gas, with government policies encouraging gas use in place of coal to reduce air pollution.
Government policy will continue to be the key factor affecting coal imports, and remains the largest uncertainty to the outlook.
In particular, the government is expected to increasingly use coal import restrictions to target domestic coal prices within a price range. When domestic prices are high, import restrictions are likely to be relaxed in order to help cool domestic thermal coal markets. When domestic prices are low, import restrictions are likely to be more stringent to support domestic coal producers.
>>India: Thermal coal imports are forecast to remain
What Happened: India’s imports of thermal coal grew by 26% in the first half of CY18.
The rise in imports reflects strong demand from growing coal-fired power generation, coupled with subdued domestic output.
What May Happen: India’s thermal coal imports are forecast to remain robust over the outlook period, growing at an average of 1.9% annually, as growth in consumption outpaces growth in domestic supply.
In Aug’18, CIL acknowledged that the production target of 1 BnT by CY20 would not be met.
While India has large reserves of thermal coal, domestic production has continued to face barriers to growth, including logistics, transport, regulatory and environmental challenges.
>>Japan: Thermal coal imports are forecast to remain broadly steady
What Happened: Japan’s imports of thermal coal declined by 1.9% Y-o-Y in the first half of CY18.
Japan’s thermal coal imports have been affected by the ongoing restart of nuclear reactors following the Fukushima disaster in 2011. Nine of Japan’s fleet of 42 nuclear reactors had gained approval to restart, though operations at Ikata no. 3 have been suspended pending a High Court injunction.
What May Happen: Japan’s thermal coal imports are forecast to remain broadly steady out to CY20.
While Japan’s thermal coal demand is expected to be affected by ongoing nuclear restarts, with another two reactors expected to restart by 2020, there are new coal-fired power plants in the project pipeline which will support import demand.
There are 11 coal-fired power plant projects with a combined capacity of 4.5 GWs that are expected to come online over the next 2-3 years.
>>South Korea: Thermal coal imports forecast to decline
What Happened: South Korea’s thermal coal imports grew marginally, by 1.5% Y-o-Y, in the first seven months of the year, supported by prolonged maintenance work at over half of its nuclear power fleet.
Over the same period, imports from Australia declined by 24%, while imports from Russia, South Africa and Canada grew by 14%, 20% and 63%, respectively, primarily driven by price differentials.
What May Happen: South Korea’s thermal coal imports are forecast to decline over the outlook period, as more nuclear reactors come back online from maintenance work.
Coal imports are also expected to be affected by government efforts to shift away from coal-fired power generation. The latest, in a series of measures aimed at reducing coal use, is a proposed additional consumption tax on coal (which could take effect in April 2019), representing the largest coal tax rise to date.
New regulations on the sulphur content of coal consumption could further support a substitution away from Australian coal, which has higher than average sulphur.
However, as the sulphur content cap applies to consumption, not imports, it does not exclude the buyers from importing coal from Australia as these just need to be blended with lower sulphur coal from elsewhere.
World Exports
>>Indonesia: Thermal coal exports forecast to grow
What Happened: Despite inclement weather, Indonesia’s thermal export exports grew by 14 % Y-o-Y in the first five months of CY18.
Indonesian thermal coal price, which is typically lower energy than Australian coal, have declined, especially relative to the Newcastle 6000 NAR benchmark price. This has supported strong growth in exports of Indonesian coal to India, which is a particularly price sensitive buyer.
What May Happen: Indonesia is expected to remain the world’s largest exporter of thermal coal, with exports forecast to grow by 4.4% in CY18 and by 0.9% and 1.2% in CY19 and CY20, respectively.
Indonesia’s thermal coal exports growth is expected to be driven by more supportive government policy over the outlook period.
The government has historically prioritised securing low-cost coal for the domestic power sector, through the implementation of price caps and a requirement to sell at least 25% of coal domestically (the Domestic Market Obligation-DMO).
Besides, there is growing pressure to increase coal exports to help narrow the country’s current account deficit.
Indonesian Ministry of Energy and Mineral Resources revised the 2018 coal production target, with the additional tonnage intended to increase exports.
>>South Africa: Thermal coal exports to remain broadly steady
What Happened: South African thermal coal exports totaled 45 MnT in the first 7 months of 2018, remaining broadly steady Y-o-Y.
What May Happen: South Africa’s thermal coal exports are forecast to remain flat over the outlook period.
Eskom, the national electricity utility, has had financial difficulties due to large debts, and its coal supply contracts with domestic producers are expiring soon.
There is a risk that after the contracts expires; the utility will not be able to secure coal at prices it can afford, resulting in the South African Government potentially intervening and requiring producers to divert sales from export markets to the domestic market, which could further reduce the country’s exports.
>>Russia: Thermal coal exports set to grow
What Happened: Russia’s thermal coal exports have grown by 16% Y-o-Y in the first five months of CY18.
After a strong start to the year, Russia’s thermal coal exports have slowed, driven by a seasonal decline in demand from Europe and weather-related disruptions.
What May Happen: Coal exports are expected to continue to grow supported by growing sales to the Asian market, a weak Ruble, and rail and port capacity expansions.
>>United States: Coal exports expected to decline
What Happened: Thermal coal exports from the United States have continued to surge, growing by 42% on the year in the first half of CY18 as a result of high prices and strong demand.
What May Happen: Exports from the United States are forecast to drift lower over the next two years, as prices decline and as tariffs imposed by China and Turkey take effect.
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