The surge in third-quarter coal prices is big news. Recent increases are both unexpected and unprecedented in magnitude. Coking coal is now US$213/t. Australian export thermal coal hit US$84/t this week, so it has nearly doubled from its decade low as well.
So is the coal industry back to the races?
To deny the price rally and the associated surge in coal equity prices—Whitehaven Coal Ltd’s share price is up 600 percent year to date, for instance—is to deny the obvious. If you study equity markets long enough, you learn that to stand in front of a train is very dangerous because more times than not the market is right.
However, as the Minerals Council of Australia itself noted this week, there’s a risk in conflating price and volume. There are very different trends at work here.
Volume of global coal demand in 2016 is weak, and IEEFA estimates that it is down 2.7 percent year over year. This decline follows a similar one in 2015. China coal demand is expected to be down by perhaps 2.2 percent this calendar year, and U.S. demand is likely to be down about 18.5 percent year over year. The European Union, I’m told by reliable observers, will be down 13 percent year over year, and demand in Japan will likely be flat, which leaves India and Southeast Asia as the sole sources of demand growth in 2016.
Why, then, are seaborne coal prices going through the roof two years after global coal consumption peaked and entered a long, slow structural decline?
We’d note, first, that China’s coal imports are up 15 percent year-to-date to September, to 180Mt. This is after a 30 percent year-over-year decline in 2015 (adding to the 11 percent decline reported in 2014).
China’s thermal power generation was up a staggering 12.9 percent in September after being down 1.9 percent year over year in the first seven months of the year. Why? Because of the government’s economic pump-priming and because of weather (hydro was down 13 percent year over year for the month after being up 12 percent year over year in the first seven months of the year). So just after China put a massive brake on domestic coal production (volumes down 10 percent in the first seven months of 2016), China’s coal demand went through the roof in the quarter ending in September. Imports of coal rose 31 percent year over year in August 2016, and probably by a similar amount in September. Prices respond much faster than volumes.
But that’s just half of the story. India is the other half, as the single-largest thermal coal importer in the world. In the year to March, Coal India Ltd delivered growth of 8.6 percent year over year in production volume. But in April 2016, Energy Minister Piyush Goyal told Coal India Ltd to slow its production growth because its stockpiles had reached 50Mt. It was an unsustainable turn; there was nowhere left to even store any more coal.
Fast forward to August, when Coal India Ltd was affected so severely by monsoons that coal production was down 10.5 percent year over year for the month. Combined with an additional unexpected 5.2 percent decline in production in September 2016, India is seeing a short-term squeeze, even though electricity demand in the third quarter was only up a tepid 1.3 percent year over year (after notching close to 10 year over year growth in the previous quarter). Coal India Ltd’s dispatches show that since the end of March, Coal India Ltd’s stockpiles have dropped by 22Mt, or over 40 percent, nationally.
So India and China, the world’s two largest producers, consumers, and importers of coal, have both been hit with seasonal impacts and short-term production curtailments.
IEEFA expects Coal India Ltd to lift production back toward their target of 10 percent per annum growth in the near term. We can’t see India importing thermal coal at US$80/t when Coal India Ltd’s average domestic selling price is just US$20/t (US$30/t equivalent when the quality differential is factored in). IEEFA would note also that Coal Secretary Anil Swarup warned this week that India will probably have to back away from this +10 per-annum target, given that it is more than India’s domestic needs, particularly since solar is now cheaper than coal-fired power generation.
Energy Minister Goyal remains intent on ceasing thermal coal imports into India. China is busy retrenching 1.2 million coal miners and remains set on an orderly retreat from excessive reliance on coal-fired power. Over time we expect China’s imported coal requirements to continue to fall by 10-20 percent annually this decade.
We see the production-versus-demand trends reported for the quarter ending in September as anomalous for both China and India, and we think the resulting price hike is likewise anomalous. Our view is that global thermal coal demand is falling overall, and that renewables are getting more cost competitive every month, driven by fast-evolving technology gains. Solar is going for US$24/MWh in the United Arab Emirates and US$33/MWh in Mexico, for instance, prices that suggest long-term possibilities around the world.
Tim Buckley is IEEFA’s director of energy finance studies, Australasia.
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