2019 so far: The International Coal Markets in Review by Gareth Griffiths of Perret Associates
by Gareth Griffiths of Perret Associates
To date, the 2019 thermal coal market has seen a major correction in the benchmark thermal coal prices. The API2 market has crashed to around $50/t after having been at $95/t a year ago; South African API4 prices have declined from $ 105/t, a year ago, to around $60/t and the Australian Newcastle price has slipped down from $107/t to around $75/t. It should be noted that these low prices are still above the prices which the market experienced in early 2016.
Several factors appear to have contributed to this major correction to market price levels:
Reduced demand in the European markets:
Europe has faced subdued demand for coal-fired power generation, arising from increasing renewables-based power generation and the combination of low natural gas prices and higher cost of carbon credits. This has resulted in gas-based power generation displacing coal, because the clean spark spreads have been more attractive than the clean dark spreads. It is becoming far more difficult for power companies to predict their coal requirements as coal becomes a more swing source of power generation for them. So, it's not surprising that coal stockpiles in the Amsterdam-Rotterdam-Antwerp region reached a multi-year high of 8.26 mt last month with the result that some of the stockpiled coal has been reloaded on vessels for markets in the Mediterranean.
A mixed picture in the Indo Pacific:
The coal demand picture is more mixed in the Indo Pacific markets, with Indian imports running at high numbers with record imports of 17.9 million t in April. Chinese thermal coal imports have declined only marginally on a year to year basis but imports into South Korea are down by around 5 million t for the first four months of 2019 compared with the same period last year because of the introduction of more restrictions on coal-burning power plants. LNG spot prices have sunk to three-year lows in the region and this will have displaced some coal burn. As in Europe, coal stocks at receiving ports and plants appear to be at healthy levels with Chinese Genco stocks at 30 days. This means that the market cannot expect a short term surge in demand to stabilize the market.
Coal supply remains steady across the globe:
There has been no significant disruption to coal supply during 2019 and this has contributed to the current oversupplied state of the market. There appears to have been a surge in the exports of Indonesian coal during April and May which equate to an annualized increase in exports of 57 million t. Following significant investment in Russian coal export infrastructure and coal mining capacity, Russian coal exports were 15% higher at 53 million t in Qtr 1 2019 on a year to year basis. The gradual devaluation of the Russian rouble to USD, which was 15.6% over the period, has also played a part. However, current prices in the Atlantic market would suggest that some Russian coal mines would find it difficult to be price competitive - but take or pay transportation arrangements, price hedging and short-term rail rebates will cloud the likely outcome. Australian coal exports were up 4 million t at 125 million t for the January - April period with thermal coal exports up 2.7% at 49 million t. The devaluation of the Australian dollar against the US $ of nearly 9% over the last 12 months has benefited Australian exporters. Despite lower market prices, exports of US thermal coal only declined by 8% to 10 million t for Qtr 1 2019 on a year to year basis and American thermal exporters are indicating that their shipments should hold firm for the rest of the year because most of their forward sales have been price hedged. Colombian coal has suffered the largest reduction of exports in the January - April period, with exports at 23 million t which was down by 15% compared with the same period in 2018.
How will the thermal market find its supply and demand equilibrium to stabilize price levels?
The prices for benchmark quality coals with a calorific content of 6000 Kcal/kg NAR have now declined to such an extent that the incentive to use lower quality coal has lessened and so it's expected that these lower CV coals will be under greater pressure to withdraw from the market in the coming months.
In contrast, the pricing of coking coal has not suffered a correction with the price of Australian premium hard coking coal sill hovering around the $200/t level. The market is being supported by the very strong performance of the Chinese steel industry this year. Crude steel production was up 10% for the January - April period on a year on year basis. Pig iron production was up 9.1% which translates into strong demand for coke and coking coal. Imports of metallurgical coal increased from 16.7 million t to nearly 24 million t with imports of Australian met coal up 50%. However, the rest of the world experienced a reduction of 0.6% in steel production and many steel companies are under financial pressure because the price of iron ore due to production cutbacks in Brazil, which has further increased costs that have been difficult to recover through higher steel prices. If there were a downturn in Chinese steel production, coking coal prices would probably suffer a price correction but not to the sub $100/t prices experienced in early 2016.
You can hear more from Gareth in September, in his role as Course Director for the School of Coal Oxford.