The price of thermal coal—that used for power generation—has hit a new 2016 high this week of US$69/t, with spot coking coal reported to have doubled, to US$150/t.
As to coking coal, the Australian Financial Review today warned that the spot market is very thinly traded and that the few trades around US$150 represent participants covering shorts, such that this price rally is not expected to be sustained medium term.
On thermal coal, IEEFA would argue the same applies, and we would reference the forward price down at US$61.40/t by 2022 as suggesting the market generally agrees.
We would note also that the 10 percent decline in coal production across China in the first seven months of 2016 is the key pressure point. With China’s coal consumption down “only” 4-5% year over year, imports are making up the difference. When domestic Chinese coal production runs at 10-15 times that supplied by imports, a 5 percent domestic shortfall can lead to a real squeeze upwards on imports. After a 31 percent year-on-year rise in China thermal coal imports in July, Reuters reports that total Chinese coal imports for August 2016 were 26.6Mt, +52 percent yoy. Year to date Chinese total coal imports are +12.4% yoy to 156Mt.
With Shenhua China reporting cash cost of production of coal at just US$16/t pre-freight, a supply response is inevitable—either from within China and/or by Indonesia. While off a small base, Chinese coal exports January to Aug 2016 are 6Mt +72.2 percent yoy. A sign of things to come with China returning to being an opportunistic net exporter by the end of this decade? This remains IEEFA’s central forecast.
A second factor is that Coal India Ltd’s Aug 2016 production was down 10% year over year due to heavy rain-related disruptions and planned slowdown in growth due to still excessive inventory stockpiles. Coal India Ltd’s coal production is up only 1% yoy in the first 4 months of the 2016/17 year, well below the 10 percent per annum growth target. As such, with the Indian economy still growing at some 7 percent annually in real GDP terms, Indian coal imports in the first four months of 2016/17 are only down 1-2 percent yoy (vs IEEFA’s expectation of -20 percent yoy for the full 2016/17).
India’s coal-import demand is fading, in other words, just not as quickly perhaps as IEEFA has predicted.
Tim Buckley is IEEFA director of energy finances studies, Australasia. Nicholas Simon is an IEEFA energy analyst.
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