By Michael Hunt

January 5, 2021 - China has continued to place power restrictions on industry and commercial use, as the shortage of coal (most likely due to the Australian ban) continues to impact on a strained power grid, especially under the prevailing cold winter.

Making matters worse is that major coal provinces such as Shanxi, have shut down over 160 coal mines, eliminating over 140 Mmtpa of outdated coal production capacity over the past five years. However, the CCP is now ordering all railways and coal producers to ramp up production and logistics to meet demand. Domestic Chinese coal prices remain robust.

Meanwhile, Coal India has recorded over 6% year-on-year growth in coal production, at around 156 Mmtpa in the third quarter of 2020.

Historically China has not imported South African coal due to issues with trace elements, but strong Asian liquefied natural gas prices and the Aussie coal ban, see a seismic shift in demand for South African coals. The other key export markets of India, Pakistan, and increasingly Sri Lanka, should remain resilient this year.

In the Mediterranean region, Turkey is expected to remain the largest importer, although growing supplies of Russian coal via the Black Sea, could displace Colombian and South African coal.

2021 has started on a bullish note for South African coal producers, and Eskom too has enjoyed a reprieve as further lockdowns have culled demand over the festive period. However, that situation will not last long.

With price appearing to have peaked, it seems that the main RB1 price driver may be done with his physical index sales, as the fourth quarter of 2020 has now fully priced in.

This opens up a precipitous valley with momentum falling rapidly now as it must of course revert from its recent alltime high. If price does not come down too dramatically this could set the market up for even more bullish conditions going into the start of 2021.

We will have to see where price gets to once momentum bottoms out in the next couple of weeks. A bull flag pattern is therefore the most likely price pattern to emerge from this, signalling robust conditions for the start of the year.