Coal prices to dip and stabilise in 2017

OREANDA-NEWS. October 26, 2016.  Thermal coal prices should fall from present highs early next year, but will probably find support well above the decade-lows reached in 2016, according to market analysts.

After five years of consecutive declines, global coal prices have more than doubled since February, driven higher chiefly by production cutbacks in China.

Australian prices, a benchmark for the Asia-Pacific market, breached \\$100/t last week, while South African and European-delivered coal continued a surprise rally to reach \\$87/t and \\$84/t, respectively.

But forward curves indicate the upward price trend may taper off after the first-quarter of 2017, following the northern hemisphere heating season.

API 2 forward prices are in steep backwardation — prompt prices higher than those further ahead —implying that market participants expect the relative supply tightness to ease next year.

The spread between the prompt-quarter and year-ahead contracts widened to an eight-year high on 19 October, with the calendar 2017 swap settling at \\$67.30/t — within the \\$60-70/t range deemed "fair value" by several analysts at last week's World Coal Leaders Network conference in Lisbon.

Beijing policy shifts pivotal for prices

The trajectory of future prices depends foremost on China — the country's production is two-and-a-half times larger than the seaborne market. Shut-in mining capacity has driven domestic utilities to international markets to replace supplies. But cutting a persistent supply overhang has sharply lifted domestic prices, and imports.

"When someone sneezes in China it can cause an avalanche around the rest of the world," Australian bank Macquarie Capital's head of global commodities research, Colin Hamilton, said.

To suppress domestic coal and power prices, Chinese economic planning agency the NDRC last month loosened a 276 d/yr cap imposed on miners in April to 330 d/yr for 865 "advanced mines". The sensitivity with which this boosts production is a key determinant in China's import need and feeds into seaborne prices.

The country's thermal coal imports will probably rise by about 40mn t this year to 171mn-172mn t, according to trading group Noble Resources' head of analysis, Rodrigo Echeverri. But the outlook for next year is less certain. Analysts point to tough curbs on illegal mining and the closure of outdated, inefficient capacity holding back production next year.

Economic and industrial performance is another factor. Chinese demand growth must be greater than 3-4pc to bolster thermal coal consumption, but rising nuclear, hydropower and renewable capacity additions will probably result in lower rates.

Supply tightness lends support

But seaborne coal supply will remain tight in the near term. The prospect of further heavy rains in Indonesia and tighter lending by Asia-Pacific banks for mining firms could restrict shipments from the world's leading thermal coal exporter.

Construction of coal-fired power generation capacity continues apace, predominantly in southeast Asia, but "we are seeing very few, in fact no new mine projects," consulting firm Perret Associates director Guillaume Perret said.

And soaring coking coal prices are encouraging producers, especially in Australia, to divert run-of-mine product for washing.

While the year-on-year change in Pacific basin demand depends largely on China, analysts expect marginally stronger consumption in the Atlantic basin.

Atlantic basin demand to tick higher

UK power sector coal burn is projected to rise this year, after a sharp contraction in 2015 imports pressured by a higher carbon tax and cheaper natural gas supplies. And Spanish consumption should be higher in 2016, after robust hydro generation, amid exceptionally wet conditions, pushed coal-fired generation out of the power mix last year.

Turkey, the region's largest growth market, is completing new coal-fired plants that will run on imported product. And there is upside for demand in Egypt and Morocco, as they ramp up imports, albeit from a low starting point.

But in the medium term, a growing flow of diverted LNG cargoes arriving in Europe, and renewable capacity additions and energy efficiency measures, will increasingly crowd out coal-fired power generation — with the repercussions gaining pace from 2018.

LNG to erode coal prices longer term

As new Australian LNG production pushes Qatari and US supply out of Asia-Pacific markets, Europe will become the residual buyer, UK-based consultancy Energy Aspects' head of coal, natural gas and carbon research, Trevor Sikorski, said.

Global LNG export capacity will rise by 150mn t/yr to 450mn t/yr in 2020, and coal importing countries in northwest Europe have over 50mn t/yr of unused LNG import capacity, Sikorski said. Coal-to-gas switching in the power sector has already taken place in the UK and the Netherlands this year, with more-efficient gas turbines taking market share from older coal-fired plants.

This trend may not continue until the end of this year, but it is "a warning of what is to come", Sikorski said.