Potential Bottoming of Coal Prices in 2020
02.12.2019 by Gareth Griffiths, Perret Associates. Hear more from Gareth at School of Coal Singapore 2020, where he'll be speaking.
Coming to the end of 2019 offers a natural opportunity to reflect on the international coal market over the past year and to look ahead to what 2020 holds in store.
In terms of demand for thermal coal, 2019 has turned out very differently for the Atlantic and India/Pacific markets. A combination of higher carbon and low natural gas prices, together with increasing renewable power generating capacity, made coal-fired power generation uncompetitive in European markets. This resulted in lower coal demand in Western European countries. Perret Associates expect EU15 imports to fall to an historic low of 72.3mt in 2019, the lowest level since our records started in 2000 and down a massive 23.7mt from 2018.
In contrast, the commissioning of new coal-fired power plants in South East Asia resulted in a surge in demand for imported, especially in Vietnam. We expect the country’s thermal imports to almost double in 2019 to 38m tonnes.
Demand in the largest thermal coal import markets, India and China, has continued to rise, despite significant volatility. Indian domestic coal production performed below target, especially during the monsoon season, but power station stocks have now recovered following a recovery in domestic coal production and a slow-down in coal-fired power generation. Economic growth has slowed significantly during the year and total power generation fell on a yearly basis for 3 months in a row during August-October, something that we haven’t seen in India since 2000. Nevertheless, we still expect imports to increase by 10mt in 2019, mainly due to domestic supply constraints.
The price competitiveness of international coal compared with Chinese domestic prices has resulted in continued Chinese interest in imported coal. This has created a real dilemma for policy makers, who have been keen to maximise domestic coal production to support GDP growth targets whilst at the same time keeping electricity prices low to maintain the competitiveness of its manufacturing industries.
This resulted in uncertainty with respect to forward demand for imported coal and in November the authorities once again introduced extensive import restrictions over the remainder of the year in a bid to cap total coal imports at 2018 levels. The persistently robust growth in coal demand, despite a slowing economy, was partially matched by a robust 4.1% y-o-y rise in in domestic production to 3.04Bnt over the January to October 2019 period.
Still, Perret Associates think that the import restrictions have come too late to cap imports at 2018 levels and that Chinese steam coal imports could reach 228mt in 2019, their second-highest level ever after 2013’s record 246mt. Coking coal imports could hit a new record of 76mt.
China is poised to enter 2020 with the same policy dilemmas it faced this year. It is interesting to note that Zhengzhou Futures for domestic thermal coal are currently in backwardation for the March and May contracts, which suggests a slight tightening of the domestic market.
Indonesia has been the stand-out performer in terms of coal exports. Shipments increased by around 25mt in 2018 and, following the government's decision to increase export quotas at the beginning of the year to increase royalty revenues, have exports continued to rise, increasing by 30.6mt for the January to September 2019 period at 342mt.
This surge has been supported by Indonesia’s proximity to the growth markets of South East Asia and the fact that many of the new plants built there have been designed to use lower CV Indonesian coal. Perret Associates estimate that some 220mt of the 342mt of Indonesian coal exported in the January to September period was sub-bituminous 4200 kcal/kg GAR material.
The two big suppliers which have seen reductions in exports this year are the United States and Colombia. US thermal coal exports could fall to the low 30smt in 2019 compared with 48.3mt in 2018. Colombian exports could be some 5mt lower, despite an increase in exports to Asia.
Both countries have been trying to sell coal which has been displaced from the European market into Asia but as the year has progressed this has become far more challenging as Asian prices have come off.
The implementation of the IMO 2020 marine bunker sulphur restrictions could further handicap such coal movements because of a potential rise in freight rates. What’s more, US high sulphur coal’s prospects in the Asian market have been hit recently by the collapse in petcoke prices to around $30/t (based on 7500 kcal/kg NAR), which has made the product far more competitive than US thermal coal.
The DES ARA and FOB Newcastle prompt financial contracts have fallen heavily this year, with DES ARA 6000 declining from $95/t at the beginning of the year to $50/t in April, while Newcastle 6000 dropped from $115/t to $65/t. Australian high ash 5500 kcal/kg NAR coal prices have also been hit, dropping $10/t to $50/t.
Interestingly, the price of Indonesian 4200 kcal/kg GAR coal has not followed the same trend as its higher calorific value counterparts. It bottomed out at $30/t at the beginning of the year and then rose to $40/t by April, before falling back to around $32/t in the fourth quarter. This price movement coincided with a doubling of exports to China from May onwards compared with Q119 exports levels.
The Asian thermal coal market is being tested at the moment by a number of developments, such as the South Korean government’s decision to restrict coal-fired power generation from December 2019 to February 2020 to reduce dust emissions. This could take up to 5mt of coal out of the market.
Taiwan’s top utility, Taipower, has also been obliged to suspend operations at its 5500MW Taichung coal-fired plant for the next two months, due to pollution concerns, which could reduce coal demand by 2mt.
This is all on top of China’s restrictions on thermal coal imports over the rest of the year.
Meanwhile, Perret Associates notes above-average coal stocks in North West Europe, India and China.
Many different scenarios could develop in 2020 for the steam coal market. In the long term, we think the scenario of relatively robust demand in India/Pacific, due to overall growth in power demand, remains intact. Despite the gradual erosion of coal’s share in the electricity mix vs. nuclear, hydro, wind, solar and LNG, the absolute volume of coal being consumed will remain relatively stable and even keep increasing in some countries (China, Vietnam, India).
At the same time, the structural lack of investment in greenfield coal mine projects should help to keep the market relatively balanced, if not in shortage.
2019 might be a record year for global steel production, despite the slowdown which has emerged since October. Pig iron production (which correlates better with metallurgical coal demand than steel production) increased by 2.7% to 1.06Bnt in the first ten months of 2019. Chinese output increased by 5.4% to 675mt, which meant that Rest of the World pig iron output fell by 1.8% from 2018.
Benchmark metallurgical coal prices have been declining all year, with the price of Australian Premium Low Volatile coking coal dropping from over $200/t to below $140/t. Overall demand for met coal has increased, except for the last quarter of the year, when Chinese import restrictions started having a negative impact, but the absence of significant supply disruption and increased exports of Mongolian met coal into China has kept the market well-supplied. Domestic Chinese met coal prices have also fallen but remain above international levels.
The met coal outlook for 2020 will be determined by the strength of the global economy. If growth rates continue to falter, we expect demand for met coal to fall, putting more pressure on current price levels.
In the past, when the La Nina weather phenomenon has appeared during the first quarter of the year, the frequency and intensity of typhoons has increased, disrupting coal production and transportation in Queensland, which has caused huge spikes in met coal prices.
However, the current meteorological forecast is for a neutral El Nino/La Nina weather pattern and abnormal weather-related disruption is therefore not anticipated for the first quarter of 2020 in Australia.
Hear more from Gareth at School of Coal Singapore 2020, where he'll be speaking.
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