Australian department of Industry, Innovation and Science has released a quarterly report on thermal coal which provides an outlook for coal prices, demand and supply. Major take-away from the report on quarter ended on Jun’18 are elaborated below.
Australian Thermal Coal Prices:
What Happen:
The Newcastle benchmark spot price averaged USD 104/MT in the June quarter, retracing the sharp fall in March with a strong rally throughout April to June.
The spot price has been buoyed by a tighter market, with limited growth in supply combining with strong demand from Asia.
What May Happen:
The spot price is forecast to remain well supported over the next few months, as a result of a relatively tight market. However, with most of the contributing factors expected to be temporary, the price is forecast to decline from late 2018.
Negotiations between Glencore and Japan’s Tohuku Electric to set the price for a thermal coal supply contract for the 2018–19 Japanese financial year (JFY April 2018 to March 2019) have ended without a settlement, 3 months after the official deadline of 1 April. Prices may now need to be settled by an alternative method, such as an index basis.
Outlook on Thermal Coal Imports:
>>China: Government policy continues to drive the outlook for China’s coal markets
What Happen:
China’s imports of thermal coal surged in the first three months of the year, to be up 26% Y-o-Y. There has been strong demand for coal-fired power, due to hotter than usual weather and low reservoir levels, which have constrained hydro power output. Coal output has also been subdued as a result of environmental checks and rail maintenance.
What May Happen:
China’s imports of thermal coal are forecast to remain solid over the next few months, before declining over the rest of the outlook period, easing from 188 MnT in CY17 to 171 MnT in CY20.
Higher domestic coal output is expected to substitute for imports. Despite ongoing capacity cuts, the addition of new capacity is expected to result in a net increase in output.
Policy changes have continued to drive China’s coal markets, and remain the key risk underpinning the outlook for thermal coal imports.
Recent policies include:
1. Sporadic banning of imports of coal to certain ports.
2. Measures to cool domestic thermal coal markets, which could drive a gradual shift away from imports. These measures include targeting domestic spot prices at below RMB 570/MT (around USD 90).
3. Boosting supply under long-term contracts to 200–300 MnT, and increasing supply from the key thermal coal-producing provinces of Shanxi, Inner Mongolia and Shaanxi by 250 MnT this year.
>>India: Thermal coal imports forecast to grow modestly
What Happen:
India’s thermal coal imports grew by 22% Y-o-Y in the first three months of 2018, before declining by 6.5% in April as a result of a government directive to divert CIL’s supply to utilities.
What May Happen:
India’s imports of thermal coal are forecast to grow marginally over the outlook period, as growth in consumption outpaces domestic supply growth. Higher than expected production from the domestic coal industry and the possibility of further measures to encourage higher domestic production could weigh on import demand.
>>Japan: Coal will continue to be a key source of power in Japan
What Happen:
Japan’s imports of thermal coal remained broadly steady year-on-year over the first four months of 2018.
What May Happen:
Japan’s thermal coal imports are forecast to rise slightly in the second half of 2018, but fall modestly in 2019 and 2020 as nuclear reactors restart.
>> South Korea: Proposed cap on sulphur may change sources of imports
What Happen:
South Korea’s thermal coal imports declined by 3.5 % Y-o-Y in the March quarter of 2018, before a 22% Y-o-Y jump in April. There has been a substantial rise in coal-fired power generation as a result of a drop in nuclear power output, with 11 of 24 of South Korea’s nuclear reactors offline due to outages and maintenance.
What May Happen:
South Korea’s imports of thermal coal are forecast to gradually decline, as a result of broader government efforts to shift away from coal-fired power generation.
There has been a proposed restriction on the sulfur content of coal imports of 0.4%, which has the potential to change market dynamics. However, there remains some uncertainty regarding the detail of the policy. The new restriction may result in a shift away from Australian thermal coal, which is high energy, but has higher average sulfur content than coal from Russia, Indonesia and South Africa.
Outlook on Thermal Coal Exports:
>> Indonesia: Coal exports forecast to remain broadly steady
What Happen:
Indonesia’s coal exports have been affected by adverse weather conditions affecting loading and production.
What May Happen:
Exports are forecast to remain broadly steady over the outlook period, with production growth constrained by a shortage of equipment.
The outlook for Indonesia’s coal exports is subject to some uncertainty, as the government seeks to balance security of supply for its growing coal-fired power generation fleet (from example, through setting a domestic price cap) against the risk of dampening incentives for further growth in exploration and investment activity.
>> Russia: Exports are set to continue their recent strength
Russia’s thermal coal exports grew by 13% Y-o-Y in the March quarter of 2018. Thermal coal export growth is set to continue, supported by growing sales to the Asian market and the weak Ruble.
>>South Africa: Export growth constrained by a range of issues
South Africa’s exports of thermal coal have declined in recent months, as a result of strong domestic demand, shortages at Eskom (the state-owned major power utility), and a range of production, transport, equipment and weather issues. South Africa’s thermal coal exports are forecast to be flat over the forecast period, as some of these issues continue to constrain supply growth.
>> US: Thermal coal exports from the United States are forecast to drift lower
Thermal coal exports from the United States increased by 22 per cent in the first three months of 2018, driven by higher prices and strong demand. The US Energy Information Administration is forecasting a decline in thermal coal exports over the next two years, as prices decline.
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