Global Coal Markets: When Does a Seasonal Trend Become a Structural Decline?

The latest data out of China is worth talking about even if it sounds like we’re repeating a story from last month. The country’s coal imports were down 41 percent year-on-year again in May, and coal imports this year are now down 44 percent year compared to 2014.

So coal imports into China—the world’s recent former largest coal-import market—have halved in the past 18 months. How long till a seasonal bit of weakness becomes a structural trend? I think we’re past that point.

But wait, you may say, there’s India, which is now the world’s largest coal import market.

But didn’t the Indian energy minister recently say stockpiles of imported coal were at record highs in May? And wasn’t domestic coal production in India up a record 12 percent year-over-year, according to Coal India? And isn’t the government pushing hard to add 175 gigawatts of renewable energy through a program that has drawn recent heft from investors that include Softbank, Foxconn, Adani, SunEdison, Reliance Power and NTPC, India’s largest power utility?

These questions of course are rhetorical and none of them bode very well for seaborne coal markets. Our forecast here at IEEFA is that thermal coal imports into India—which industry proponents will argue will replace the slack created by China’s waning imports—will peak in 2015 and then rapidly decline through to 2020.

As all these trends develop, watch for divestment from coal companies to gain momentum globally. The stock of Peabody Energy, the largest private-sector coal company in the world, is trading this morning at yet another record low after management departures. And the company has a few fire-sale assets on the block, by the way, as do several of its competitors.

MEANTIME IN SOUTH KOREA, THE WORLD’S FOURTH LARGEST IMPORT THERMAL COAL MARKET, THE TAX ON COAL IMPORTS WENT UP 26 PERCENT TODAY, to U.S. $21 per ton.

The increase, which was a long time in the planning, is part of a national pollution-control scheme.and shows that major coal users will face a progression of higher taxation, regulations and carbon prices, continuing the erosion of their competitiveness even further with time.

Hellenic Shipping News Worldwide has this incisive comment on one of the impacts of the tax increase: “Korean buyers are likely to become more selective in coal quality in an oversupplied market.”

The South Korean government has also recently announced the cancellation of four coal-fired power plants that had been on the drawing board. Those plants were to have been completed beginning in 2019.

AND IN AUSTRALIA, THE GOVERNMENT’S OFFICE OF THE CHIEF ECONOMIST JUST RELEASED ITS MOST RECENT QUARTERLY REVIEW in which it estimates Australia’s total production of thermal coal fell 0.7 percent to 246 metric tons in 2014-15. According to the review, while domestic thermal coal demand is down, exports grew by 3.2 percent in 2014-15 to 201 metric tons and will rise by a further 0.4 percent in 2015-16.

Australia is gaining market share, in other words, but it is doing so in a market that is shrinking—a losing strategy.

The Office of the Chief Economist also has decreased—by 40 percent—its forecast for how much coal China will import in 2015, to 157 metric tons from 230 metric tons. The office predicts that this trend will reverse course in 2016, but doesn’t say how or why.

It cites a recent acknowledgement, too, by the International Energy Agency that global thermal coal imports declined in 2014 and will mostly likely decline again in 2015 before a fractional recovery in 2016.

Any such recovery, however, is predicated on demand from—you guessed it—China and India.

Tim Buckley is director of energy finance studies, Australasia.