Bank of America Report: Coal Recovery is W-Shaped
June 15, 2020 - Global coal prices collapsed in recent months as the global lockdown took its toll on power demand around the world. Newcastle prices dropped to a low of $50.50/mt in late April and only recovered slightly to $55 Thursday, according to a Bank of America (BofA) research.
Demand is now sequentially picking up as the world emerges from lockdown, but some supplies namely in Colombia have been adversely affected by the lockdown. Those two factors should allow Newcastle thermal coal prices to recover further in the coming months and thus we set our 2H20 forecast at $61/mt, $3 above the current forward.
Yet near-term tightness should give way to looser balance in 2H20 as the recession lingers, weighing on the coal demand recovery. Meanwhile supplies could recover relatively faster than demand, which means we may see renewed weakness in 2H20 and coal prices could briefly dip below $50/mt.
The Global Coal Demand Recovery is W-Shaped
As people return to offices, factories and shops, demand for power and therefore coal is also recovering sequentially at a rapid pace. In parts of Europe, driving activity is already back at pre- or even slightly higher than pre-lockdown levels.
This sequential recovery as the lockdown eases, however, hides the underlying macro weakness on extremely elevated unemployment levels and poor consumer sentiment that could remain at least throughout 2020.
As the lockdown eases, the recession morphs from predominately a transport recession in 1H20, into something that resembles a more regular recession in 2H20, with broad-based adverse impact on all sectors of the economy in 2H20.
We expect the recovery in coal demand to follow a W-shape, albeit with a shallower second dip. Overall, we expect global seaborne import demand to contract by 100 million tons, the largest drop in a decade.
Supply is Adjusting Slowly So Lower Prices May Be Needed
On the supply side, most of the supply cuts so far are economical, i.e. due to lack of demand or poor economics on low prices. Key exceptions are China, whose mines were closed as part of the lockdown, and Colombia, which is still facing severe mining and railing disruptions due virus and lockdown.
At current coal prices, 81% of global production is still covering cash costs. Given the severe demand contraction in 2020, prices may need to temporarily go lower still to force sufficient supply restraints to balance the market. Price sensitive producers are starting to curtail output.
True, US production is already falling sharply, but that is in part because most of these exports were already uneconomical before the COVID-19 lockdown. Exports in the other key swing producer, Indonesia, are still rising although at a slowing pace and we expect outright contractions to follow in 2H20.