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Interview: Jim Nicholson, Senior Vice President Asia, Argus Media Ltd

Jim shares his views on the changes affecting the South East Asian coal market and his opinion on the increase of thermal coal prices.

Coaltrans Conferences (CC):
We look forward to welcoming you as a panellist at the Coaltrans Emerging Asian Coal Markets conference in Manila next month. You have attended all previous editions of this event as well. What are the biggest changes to South East Asia’s coal market that you have witnessed over the past year?

Jim Nicholson (JN): The main change in the market has been the rebound in coal prices over the last few months, with prices of the most liquid GAR 4,200 kcal/kg Indonesian coal increasing to a 32-month high (as of late last week).

At last year’s Emerging Coal Markets conference, and at other recent Coaltrans events, there has been a view that prices had reached a floor following years of declines. But the pace of the rebound and the strength of the rally has taken most people by surprise.

CC: The Philippines recently welcomed a new President, Rodrigo Duterte. How much do you think his arrival has influenced the future of the Philippines as a hotspot for coal-fired power development?

JN: It is too early to say: Duterte has so far proven to be unpredictable and his economic priorities are still unclear. His main focus seems to be on tackling crime at street level and he may be happy to delegate the economy to others.

That said, the Philippines is currently one of Asia's fastest growing economies with a growing industrial sector. Policies have been introduced to help boost economic growth, including increasing spending on public infrastructure projects.

Coal makes up a third of the Philippines' 18.5GW installed power capacity and an estimated 4.6GW of new coal-fired capacity is scheduled to come on line by 2020, which is widely expected to boost the country’s demand for imported coal.

Total thermal coal demand in the Philippines is forecast to reach around 14.49mn t of oil equivalent (toe) in 2020, before increasing to 16.11mn toe by 2025 and to 18.44mn t in 2030 as new generation capacity comes on line.

CC: Which South East Asian country do you think offers the most promise for thermal coal imports over the year to come and why?

JN: On the whole, demand in Southeast Asia is increasing, albeit from a relatively low base.

Vietnam, particularly, has seen huge increases in its imports so far this year, with deliveries during January-August reaching 9.57mn t, which is 33pc higher than 7.17mn t for the whole of last year.

Vietnam’s imports in August alone more than doubled from a year earlier.

It’s unclear how long this this pace of growth can be sustained, although new generation capacity is being developed and the first of two 622.5MW coal-fired units at the Coastal Thermal Power Plant 3 project in Tra Vinh province were connected to the national grid as recently as last month.

Initial tests on the unit began last year, with the operator experimenting with the use of different coal qualities.

Which are the natural suppliers to this country based on the outlook for prices and qualities in demand?

JN: Indonesia has been the traditional supplier of thermal coal to Vietnam due to its close proximity and favourable freight costs, although this has changed dramatically this year with the emergence of Russia and Australia as big suppliers to Vietnam.

Vietnam imported 3.17mn t of Australian coal in January-August, sharply higher than 751,565 t in the year earlier period.

Vietnamese customs data do not differentiate between coking coal and thermal coal, but the high prices that Vietnamese importers paid for Australian coal during the period suggests that coking coal made up a sizeable percentage of overall Australian shipments.

Vietnam’s imports of Russian coal have also increased sharply, reaching 2.96mn t in January-August compared with just 651,976t a year earlier.

Russian coal exports to Vietnam and other buyers in Asia-Pacific have risen sharply after the country enhanced its capacity to rail coal to ports on Russia's east coast, and this trend is expected to continue.

We are hearing that infrastructure obstacles in Russia and a shortage of railcars used to transport coal to the country's far east ports are delaying deliveries to Asia-Pacific buyers of late, although this is expected to be a short-term problem.

In contrast to the above, Indonesia exported just 1.83mn t to Vietnam in January-August, which was just slightly higher than 1.18mn t a year earlier.

One of the main reasons why Indonesian coal has lost market share in Vietnam is that low coal prices (and cheap freight)  have made higher quality coal from Russia and Australia cheaper on a heat-basis.

But it will be interesting to see if this trend away from cheaper, lower-quality Indonesian coal persists, if international prices continue to increase.

Vietnam is planning new infrastructure including new ports which will be able to handle Capesize vessels in the coming years – The ability to handle Capesize vessels could open the Vietnamese market up even further as it will help bring $/t freight costs down, potentially meaning coal from other producer countries could start to price in. 

CC: Do you think thermal coal prices will continue to increase into Q1 and Q2 2017? Why (/not)?

JN: Much will depend on Chinese policy. The recent rally in seaborne prices was largely triggered by Chinese production cuts earlier this year, which drove up domestic prices and pushed up demand for imports.

As part of a series of policies aimed at rebalancing supply with demand, China capped the number of days mines could operate at 276 d/yr from 330 d/yr previously.

In addition, Chinese utilities were forced to replenish coal inventories after a summer heatwave drove up power demand and dragged stocks lower.

But policies on  working days are now being relaxed and there is a view among some people in the market that China's reliance on imported coal may ease for the rest of this year.

This is because Beijing allowed some mines to operate at an annualised rate of 330 d/yr in October-December.

This would effectively increase working hours at the mines by 20pc from the current working day cap of 276 d/yr.

The move is designed to raise domestic coal supply to help meet an expected rise in demand for heating use during the winter.

That said, there is also a view in the market that prices could stay firm into Q1. In addition to expectations of strong Chinese demand over the winter, the next Lunar New Year holiday is earlier than usual (late-January).

Chinese buying typically increases in the lead-up to the holiday and in previous years this has supported prices.

There are also supply issues – heavy unseasonal rain has hampered Indonesian production for months and supply out of the Russian far east is being hampered by rail issues (as per above).

In addition, there is limited scope for output to increase in key producer countries like Indonesia. Indonesian production and exports are in decline because years of low prices have forced mining firms to either reduce capacity or close unprofitable pits completely.

It won’t be easy for this capacity to be brought back on line due to a lack of available funding.

Many Indonesian producers are in debt and banks aren’t as willing to finance coal projects as they were before, especially as Indonesian supply indiscipline previously contributed so heavily to the crash in prices.

You can hear more from Jim at the 5th Emerging Asian Coal Markets in Manila on 17 - 18 November.

October 2016.

This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.