International Thermal Coal – Will Current Trends Continue?

Russia will continue to increase its exports of 5,500 to 6,000 net as received (NAR) products, and South Africa will not expand, but lower CV coal will be limited. Australia does not seem to have extra capacity in the short term, and Colombia also appears limited. The U.S. will compete only when prices are high enough.

While the cost of production continues to increase due to geology, labor, machinery and fuel, the produced coal quality continues to diminish. The average CV of export coal has dropped over 10 percent in the past 15 years, from about 5,900 kcal to 5,200 kcal. The wide price gaps seen between higher and lower CV coal may result in consumer adjustments to burn a wider range of coal and to switch faster.

 

Coal Trends – Demand Side

 

In June 2019, media mogul Michael Bloomberg announced a new pledge of $500 million to bring down coal, with continued targeting of U.S. coal power plants. Meanwhile, the U.K. has essentially ceased coal burn and Germany plans to stop coal burn by 2038. What about the rest of the world?

In the short term, China’s demand fluctuations continue to rock our industry. 2018 imports were up compared to 2017 despite the end-ofyear pullback and resulting turmoil. For 2019, it appears Chinese imports will be lower than 2018 but hopefully still above 2017. The first half of 2019 confirms this trend. Of course, China’s growth is slowing but this is not a problem as the base for growth is much higher. Power demand continues to increase, as services, homes and even manufacturing become more power intensive. Urbanization and mine closures continue to drive coal imports. Countering these trends are a substantial policy shift into renewables, international pressure to reduce dependence on coal and increasing investments in more efficient Chinese domestic coal production. Also, new transmission infrastructure allows electricity to travel farther from inner China. The net effect of all of this is unknown, but China will keep importing and import levels will be volatile. In 2019, China may start earlier in Q4 to curb imports than in 2018. In summary, demand “miracles” supporting coal prices for the remainder of this year are unlikely.

India’s demand increased most in 2018 (20-25 Mt) and remains strong in 2019. Although the country remains structurally short of coal, it doesn’t shy away from backing off power plants when coal prices are deemed too high. India is likely to keep importing at these higher levels for several years; even government power companies are back in the import market now after a few years of abstinence from coal imports. For producers, especially in Indonesia and South Africa, this is good news. However, competition from the U.S., Mozambique and sometimes even Russia and Colombia will keep South Africa and Indonesia in check.

Southeast Asia and Pakistan also saw increased coal demand in 2018 (20-25 Mt). Looking ahead, Vietnam is expected to add over 30 gigawatts (GW) of coal-fired capacity in the next 15 years, Indonesia another 25+ GW, Bangladesh 10+ GW and Pakistan 5+ GW. In addition, increases are coming from Malaysia, Philippines, Myanmar, Cambodia, Egypt and a few others.

Europe, despite its negative policy on coal, remains structurally short of coal and is an interesting playing field, especially for the U.S., Colombia and Russia.

Wrapping it all up

Coal is key for affordable, clean and safe energy and there is no viable alternative in place. Because of the lack of investment, coal is in fact an ever more interesting investment play.

On volume: 2019/20 will see continued albeit slow increase in international steam coal demand and therefore trade.

On price: Current low prices cannot last and will rebound … when remains anyone’s guess.

On freight: Freight rates were high in 2018, but after years of fewer new builds (from 2012 highs to 2018 lows) vessel capacity will finally grow in 2019. Freight rates in 2019 have been slightly below 2018, but the oncoming sulphur restrictions for fuel will make for an interesting Q4 2019 and likely push freight rates back up.

On the fundamentals: Investments in coal are scarcer, costs are up and high CV coal is more impacted than lower CV coal. Despite current depressed markets, years of higher steam coal prices are likely. The higher pricing picture is even more dramatic in coking coal.

Dr. Lars Schernikau is a shareholder in HMS Bergbau Group of Singapore and Germany, a company marketing coal, petcoke, ores and other bulk products from the U.S., Asia and Africa. Dr. Schernikau is the author of two industry trade books on the economics of the international coal trade (2010, 2017).