Pressure on coal prices unlikely to ease for now
Analysts cite continuing overcapacity; longer term demand hinges on India and China
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Analysts cite continuing overcapacity; longer term demand hinges on India and China
Chan Yi Wen
19 November 2014
Oversupply, coupled with weakened demand, has led analysts to believe both thermal and coking coal prices will remain under pressure up till end-2015 and beyond, with India driving a prominent share of demand.
Coal has been sitting in a bear market for more than three years.
In recent times, thermal coal prices plunged even further due to tighter regulations in China to limit air pollution as well as competition from other energy sources, primarily gas and renewable energy, while stagnation in China’s steel output - the world’s primary producer of steel - has impacted coking coal prices.
According to Xavier Veillard, Accenture’s Asia Pacific director of trading, investments & optimisation strategy, overcapacity will continue to put pressure on prices of thermal coal up to end-2015 to 2016.
Due to short-term inelasticity of thermal coal output, supply rationalisation from major producing countries will likely occur only in the medium to long term, said Mr Veillard.
Price recovery of thermal coal in the longer term will therefore depend on the volume of incremental exports from the US, which is linked to natural gas price competitiveness and the amount of incremental supplies from other emerging markets, such as Colombia. In the next five years, Mr Veillard says large mining projects from the two countries are expected to come online, which will further boost supply into the market.
In his opinion, long-term demand will be driven by environmental agendas, predominantly in China, as well as the development of natural gas infrastructure to provide a cost-competitive access to a more environmentally-friendly alternative.
In his view, China will remain the dominant and largest coal consumer and importer, though increased natural gas import capacity and development of local rail capacity allowing shipment of domestic coal sources to better reach power generation assets will likely diminish the country’s imports in the medium and long term.
Thus, he expects rising demand for coal imports from India, due to the cancellation and review of domestic coal mining licences, requirements for higher grades of coal and development of the power markets reform.
On the other end, Georgi Slavov, head of basic resource research at Marex Spectron, expects coal price recovery to occur even later.
“I believe that we have reached the bottom in terms of excessive investment,” he said. “This will result in two to three years of stagnant prices and under-investment, which will be followed by tighter supply in 2016-2019, and stronger prices towards 2020.”
He added that Indian import demand for thermal coal is key for survival of the industry. “Without the 10 per cent year-on-year growth of Indian imports, there will be no uptick in the cycle after 2016-2017.”
As for coking coal, Jim Nicholson, senior vice-president of markets data provider Argus Asia, said it’s hard to see an improvement in prices until supply is reduced and demand from Chinese steel mills picks up.
But instead of cutting supply, in the past year, Australian miners, unlike their US counterparts, have focused on controlling costs of large-scale open-cut mines, which in turn exacerbated the over-supply situation, said Accenture’s Mr Veillard.
Short-term price recovery of coking coal will also be dependent on incremental steel consumption from emerging markets other than China, such as India and Brazil.
But in the longer term, Mr Veillard expects India to drive a significant share of coking coal demand, potentially overtaking China, whose steel consumption is likely to plateau with a slower economic growth rate.