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Interview: Hugh Lee, Independent Consultant

Hugh Lee talks to Coaltrans about the coal price forecast for Q3 2017, the impact of the Trump administration on the global politics of coal, and bright spots in the market we should be looking out for





Coaltrans Conferences (CC): Hi Hugh. Thanks for agreeing to have a chat with us. Please can you give us a brief introduction of yourself, and your background?

Hugh Lee (HL): I have worked in the world coal industry for over forty years. I led the work on coal supply, transport and trade for the International Energy Agency’s coal research office. Then I was deputy head of economics and strategic planning for British Coal in the eight years leading up to its privatisation. I ran the consultancy work of WEFA (now IHS Markit) on coal and electricity in Europe and the Far East. I have been an independent consultant for the last twenty years specialising in forecasting steam and met coal trade and prices, taking into account the environmental constraints.  I have visited coal mines and ports in almost all the coal exporting countries.


CC: Despite most forecasts, 2016 ended up being a good year for coal. Are you bullish as we move into Q3 2017?

HL: The unexpected rise in coal prices in the second half of 2016 was mainly caused by developments in China.  The government there had been trying to reduce their over production for some time but with only limited success. In May 2016, it limited the number of working days per year at Chinese mines from 330 to 274 per year;  this measure turned out to be far more successful than anticipated and China soon started to increase its coal imports to meet the shortfall.  World coal prices surged as result and the Chinese government eventually relaxed its working days policy so that prices fell back somewhat in the first quarter of 2017. 

No change  is expected in Chinese government policy in the next few months.  The world coal market is more in balance than it was in early 2016 because some high cost capacity, including in Australia and Indonesia, has been closed.  ARA prices are therefore likely to remain in the 70 80 $/t range (where they have been for the last quarter) for the rest of 2017 and then to gradually decline.  This view is in line with the current prices on the coal futures market.


CC: What impact do you think the Trump administration has had on the global politics of coal?

HL: The policies of the Trump administration have changed the sentiment of the US coal industry from pessimism to optimism.  The decline in US coal consumption will be less marked for the next few years.  However, the competition from cheap gas (and soon probably cheap solar) will continue to erode US coal sales.  Moreover, the actions of President Trump have not caused the rest of the world to change their views on climate change or coal, so the Trump effect on the global politics of coal will be minimal.


CC: Do you think that the industry has learned its lessons from the recent downswing, or do you see another period of oversupply ahead as markets react to higher prices?

HL: I think the world coal industry has learnt its lessons from the recent oversupply.  However, I fear that the fall in world demand for coal may be faster than anticipated and so another period of oversupply is quite possible.


CC: Where are the bright spots for coal at the moment?

HL: Vietnam and some other small South East Asian countries are increasing their coal imports to meet their fast rising demand for electricity.  In the longer term, carbon capture and storage (CCS) is likely to become cheaper and to expand rapidly;  this will significantly slow the decline in coal demand.  There are already seventeen large-scale CCS plants in operation and five more are expected to be on stream by the end of 2018.


CC:
How has the industry changed since you began your career?

HL: The most noticeable change has been consolidation in the ownership of coal mines.  Forty years ago, coal mining companies owned mines in only one country and there were a relatively large number of such companies in most coal exporting countries.  Now, a sizeable proportion of exporting mines are owned by a few international mining companies that can be counted on the fingers of one hand.

Related to this change, coal has become a commodity.  When we started the course "International Coal Supply Contracts and Transport Logistics" (now the Coaltrans School of Coal) twenty years ago, nobody accepted the idea of ‘paper’ coal.  Now indices, screen trading, swaps, futures and other derivatives are commonplace.

Another change has been China. Forty years ago, it was an insignificant part of world coal trade.  Then it became an important exporter so that in 2001 to 2004 it exported over 70 Mt per year.  However, in 2009 it changed to a net coal importer. The volume of its imports continues to have a large effect on both steam and met coal international prices.



You can hear more from Hugh at this year's School of Coal Oxford, taking place at St. Anne's College on 25 - 29 September 2017.

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.

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