It is a bloodbath out there. Global thermal coal prices have shot through the roof in CY’21. Indonesian high calorific value 5,000 GAR is up 130%, the South African 5,500 NAR has surged 160% while the Australian 5,500 NAR spurted 150%.
What fuelled this astronomical rally? And how long will this likely continue? Will China return to buying Australian coal? All these questions and a lot more were answered at SteelMint’s recently concluded webinar series, ENGAGE, held over 18-22 Oct’21.
Thermal coal imports by key countries
Reasons for the surge:
- China’s domestic supply crunch amid increased safety inspections and mines closures;
- Indonesian supply issues due to heavy rains, high Covid cases and miners’ commitment to fulfill DMOs;
- South African supplies hampered by derailments, cable thefts, and rains; and
- The sudden surge in gas prices as part of winter procurement, making countries opt for its alternate, coal.
Demand surge
Speaking on the topic, ‘The Curious Case of Global Thermal Coal Prices and How Long Will the Rally Last?,’ guest speaker Punkit Shah, Senior Manager, Coal Trading, Swiss Singapore Overseas Enterprises, said trade rebalancing is happening right now after China banned Australian coal imports.
Adding to the reasons for the price surge, he said: “China is recovering Australian coal largely from Indonesia. Requirement from Japan, Korea, Taiwan (JKT) increased. Indonesian and Russian coal prices also rose due to high demand from China. Indian buyers increased Australian imports due to price advantage.”
China’s thermal coal imports in Jan-Sept’21 touched 81 mn t while CY’20’s volumes were 121 mn t. Japan’s levels are similar while South Korea’s are 74 over Jan-Sept’21 against entire CY’20’s 94 mn t.
Amid the ongoing coal crisis in China, even if it “allows Australian coal imports this will take time to balance the demand supply flow. And even then, in Q4CY’21 prices are expected to stay high,” Shah emphasised.
Thermal coal exports by key countries
Supply scenario
Since supply is a function of demand, how will it pan out in the near term?
- South Africa: Issue of derailment and cable thefts are common in South Africa. Also, unforeseen events may occur. But Shah said the SA coal industry is working to improve its infrastructure although this may take some more time. “South Africa miners have sufficient coal to export but due to poor rail infra they are not getting sufficient coal onboard to export,” he informed.
However, even if China has started importing SA coal after a long time, due to trace element restrictions, he does not see large volumes going into China.
- Indonesia: In Indonesia, even if weather conditions are resolving, miners have to meet their supply obligations to domestic power plants. So how long will the supply squeeze continue? Shah clarifies that adverse weather conditions, which stay round the year, and with Indonesia entering the rainy season, which starts from October, is also a major factor which will pressure supplies in the next couple of months,” he said, adding, “Miners want to export but unforeseeable weather conditions are not allowing.”
- Australia: Is Australia looking to ramp up output amidst the global shortage? The country has seen many constraints throughout the year — terminal issues, adverse weather condition. “Miners are willing to export more but are unable to… Australian miners are not expected to get enough output in the near future. In fact, Australian coal prices continued to increase on high demand from the northern hemisphere countries right after the winter season,” he recalled.
What factors will influence pricing?
China’s coal futures have dropped 8-9% because of government interventions to stabilise prices. Other global indices too have corrected 2-3% on cue, especially in South Africa.
Will prices correct or drop below $200/t levels if China’s domestic supply increases? Shah feels there are actually many factors that will influence prices. 1) China is just one. 2) Gas prices in Europe and the US, which have seen a correction lately. 3) Supply constraints.
India: Buyers have no choice
Will imports of thermal coal fall in the coming months, considering the high prices? Indian imports dropped dramatically this year with plants falling back on domestic coal. However, in the past 2-3 months, domestic supply from Coal India has been impacted.
Shah does not see buyers waiting for a correction in prices since the last the 2-3 months. “They have been buying because they have to run their plants — they are already operating at the lowest inventory. Despite high-CV Australian prices still being elevated, Indian buyers have come to the market,” he reminded.
Outlook
Will the global coal shortage continue till winter but ease around February? Two factors will decide short-term future trends – the available demand for coal globally and supply disruptions from key exporting countries Indonesia, South Africa and Australia.
Depending on the demand-supply dynamics, coal prices are expected to remain volatile and high till Q4’21 and may see some increases in Q1’22 too.
“They may correct but not like iron ore and are is expected to stay extremely volatile,” Shah forecasted.
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