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Sagging Demand in China, India to Likely Weigh on Thermal Coal Prices

 

 

July 7, 2017 - Weakening demand at major consumers India, China and South Korea is likely to weigh down thermal coal prices going up to 2019, according to a report released by Australia's Department of Industry, Innovation and Science Friday.


After a price spike from late 2016 to early 2017, thermal coal prices are forecast to gradually decline, and this will eventually affect Australia's thermal coal export earnings, especially fiscal year 2018-19 (July-June), the Resources and Energy Quarterly report said.


Thermal coal prices surged in the latter half of 2016, following China's policy to curtail production and supply tightness in both Indonesia and Australia. 


The 90-day price of FOB Newcastle 6,300 kcal/kg GAR coal touched a multi-year high of $114/mt in November last year, but began to weaken once China eased its production policy. 


S&P Global Platts assessed this price at $83.50/mt Thursday.


"While prices have declined this year, the fall has not been as pronounced as expected, due to continued import demand from China -- albeit at a lower growth rate than seen in late 2016," the report said.


The spot price of FOB Newcastle 6,300 kcal/kg GAR coal is expected to decline to $69/mt in 2018 and to $66/mt in 2019, according to the report.


Global thermal coal trade in 2017 is forecast to decline by 2.4% to 1 billion mt, falling further to 990 million mt in 2018 and to 986 million mt in 2019, it added.


"Falls in trade volumes are expected to be driven by lower import demand from China, India and South Korea."


China's 2017 thermal coal imports are forecast to decline by 4.2% year on year to 172 million mt, as domestic prices ease back, the report said, adding that Chinese domestic coal prices are expected to stabilize in a range of $74-$84/mt.


Imports by China, which was the second-largest importer of Australian thermal coal in 2016, are expected to decline to 158 million mt in 2018 and to 157 million mt by 2019, as China combats rising pollution by adopting cleaner alternatives, the report said.


Likewise in India, imports are forecast to continue to decline throughout 2017, even as the Indian government cuts its domestic production target for the fiscal year (April 2017-March 2018).


State-owned Coal India Ltd. is expected to produce 600 million mt in fiscal 2017-18, down 10% from the previous forecast, amid sagging demand from utilities.


Indian imports are expected to fall 3% year on year to 161 million mt in 2017, declining further to 158 million mt in 2018 and to 157 million mt in 2019, the report said.


"Import demand in India is only expected to pick up outside the outlook period [post 2019]," the report added.


Imports by another major coal consumer South Korea, are expected to weaken going forward as the country's new President Moon Jae-in reins in coal-fired power generation.


For 2017, South Korea's thermal coal imports are expected to fall by 1.8% to 96 million mt, and further decrease to 92 million mt in 2018 and 91 million mt in 2019.


JFY Price Seen Weaker


The report said that it expects the Japanese fiscal year contract price to weaken in the next two years, as demand in India and China wanes.


The JFY 2017, which runs from April 2017-March 2018, benchmark price was settled at $84/mt in April this year, a 33% increase year on year.


However, the JFY contract price is projected to decline to $70/mt FOB Newcastle 6,300 kcal/kg GAR in 2018 and to $67/mt in 2019, the report added.


Japan's 2017 thermal coal imports are forecast to increase by 1.3% to 140 million mt, as the country increases utilization of coal-fired power plants and coal-fired installed capacity rises by 0.5%, the report said.


Japan, the largest consumer of Australian thermal coal, is expected to import 141 million mt in 2018 and 142 million mt in 2019.


However, Australia's production is estimated to be steady at about 250 million mt in fiscal year 2016-17, rising marginally to 251 million mt in both 2017-18 and 2018-19.


Australia's export volumes in fiscal 2016-17 were estimated to have risen 0.5% on year to 202.4 million mt, driven mainly by strong demand in China. 


For fiscal 2017-18, export volumes are expected to fall to 201 million mt mainly due to expected lower demand in South Korea, and declining further to 199 million in 2018-19, the report added.


Meanwhile, exports from major supplier Indonesia are expected to remain steady at 380 million mt in 2017, the report said, but cautioned that if small-sized miners ramp up production going forward, coal prices may fall under downward pressure due to oversupply.

 

For 2018, Indonesian exports are expected to be at 375 million mt, falling further to 373 million mt in 2019, as expected weaker thermal coal prices might put some high-cost producers on the back foot, the report said.