After two strong years for international thermal coal markets, Q1 and Q2 2019 remind us of 2016 again. While high prices during 2018 were beneficial to coal producers, late 2018 and the first half of 2019 were reminders that nothing lasts forever. The downturn demonstrates the fundamental volatility in coal markets.
This article looks at supply and demand factors, and policy influences, to assess future trends for international thermal coal.
Coal Trends – the Big Picture
During the first half of 2019, one development continued to stand out: the U.S.-China trade conflict and its ripple effect on almost all markets – commodities, equities and debt. Some economists are asking if this conflict is the beginning of the end of globalization. Is business becoming local again? Globalization is not over but its face is changing. The world is becoming more global every day and at the same time more local. Decentralization is fueled by the “trade wars” and also by digitalization, allowing local products and information to be consumed locally more efficiently. But the principal element of globalization is the increase in individual travel and global availability of data products and services, and that remains the key driver for the world’s continuing global marketplace evolution.
What impact is this having on the coal market? Coal has always been about logistics and quality, offered at the most competitive price. The speed at which information travels and the resulting volatility in the form of overshooting and undershooting have also impacted coal. However, the key driver remains the demand for coal-fired electricity which in turn is driven by population growth, power demand per capita and coal’s power sector market share.
Both population and global power demand per capita will continue growing, due to factors including electric vehicles and the continued digitalization of our world. The question is what happens with coal’s share of electricity generation.
International policy is creating headwinds against coal due to concern that CO2 from fossil fuel burning is the main reason for global warming (though warming of only one degree Celsius since the Industrial Revolution has occurred).
The problems of intermittent renewable power have not yet fully hit the “renewable” economies except through increased electricity prices. These increased power prices are negatively impacting competitiveness for energy-intensive industries, and Germany is an example of that.
Coal’s share of electricity generation continues to decrease in the “established” territories such as Europe, the Americas and China, and to increase in the “newly rising” territories such as Southeast Asia, Egypt, Pakistan and in the future Africa. The larger importers in Asia such as Japan, Korea, Taiwan and even India are likely to stay at current percentage levels for some years to come even though gas is pushing against coal (despite the little-known fact that the greenhouse gas footprint of liquefied natural gas is higher than coal’s, considering production, processing, transportation and combustion, instead of only considering combustion as virtually all media comparisons do).
Coal Trends – Supply Side
The coal industry has seen extraordinarily low investments for the past five years. This changed the supply balance and resulted in increasing prices. The current low prices seem counter-intuitive, yet prolonged higher prices may have the adverse effect of coal pricing itself out of the marketplace earlier.
Glencore – despite more recent media reports of a production cap – is one of the few larger companies ready to commit some capital, but others have different plans. South32 is divesting, Anglo is cautious about steam coal, Rio Tinto has effectively retreated and BHP is focusing on adding non-coal resources. Many U.S. producers are concerned about politics, economics or their investors. Indonesia and Russia have been able to continue to invest small amounts, but the cost of capital is increasing as larger and mostly Western banks and funds look at coal more carefully or are retreating altogether. Over 300 investors with more than $32 trillion in assets have signed on to the “Climate Action 100+” initiative. What remains is more expensive capital deployed in countries that are often not as environmentally strict. In the end, this is not good for our environment nor the industry.
In 2018, Indonesia and the U.S. expanded exports (about 25 Mt and 10 Mt respectively). The Indonesian government surprisingly announced it will grant substantially higher 2019 export quotas to most export miners. This decision put downward pressure on coal prices and seems driven by Indonesia’s need to collect more foreign exchange due to the Indonesian rupiah’s devaluation. The price correction in Q4 2018 and Q2 2019 was also driven by increasing lower calorific value (CV) production in Indonesia. Most of Indonesia’s export capacity expansion in 2018 and 2019 is in the range of 3,400-5,000 gross as received (GAR), so certain oversupply is expected here.