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China, rising domestic production combined with subdued power demand;
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India, a lockdown coupled with government directives that favoured domestic coal over imports;
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North East Asia, weak demand due to lower power consumption and an ongoing shift away from coal in electricity generation.
Demand from smaller importers in South East Asia was also affected as the spread of COVID-19 widened. Competition from gas further reduced thermal coal demand, with oil-linked LNG contract prices in Asia near record low levels and LNG spot prices weighed down by an oversupplied market said Office of the Chief Economist’ of Australia in its Resources and Energy Quarterly June 2020 report in early July 2020
Thermal coal prices to remain subdued due to weak demand
According to the report, the Newcastle 6,000 kcal/kg spot price is forecast to remain low for the remainder of 2020, averaging around US$56 a ton for the year as a whole. Lower power demand, as a result of a sharp fall in economic activity, is expected to weigh on seaborne thermal coal demand. The rapid build-up in coal stocks in key importing countries will take some time to rundown, and should prevent any sharp rebound in prices in the short term. The move by the Indian government to encourage the use of domestic coal over imports only adds to demand-side pressures in the world’s second largest thermal coal importer. There also remains the risk of Chinese government intervention to restrict coal imports: the Chinese coal mining industry is pressuring the government to tighten import controls, with seaborne coal prices remaining attractive relative to domestic prices, and local supply continuing to outpace demand.
Resources and Energy Quarterly June 2020 report further noted that, on the supply side, further cuts to production are likely to be required to balance the market in 2020. Around a third of production which supplies the seaborne thermal coal market (and for which data is available) is uneconomic at current prices.
Thermal coal prices are expected to rise in 2021, driven by an increase in seaborne thermal coal demand as the global economy recovers. However, longer-term trends will constrain the extent of the rise: Europe and South Korea are looking to reduce thermal coal usage, while the world’s two largest consumers (China and India) have signaled their intention to reduce thermal coal imports by increasing domestic production.
Growing demand from South and Southeast Asia should help to offset declining thermal coal imports elsewhere. Competition from LNG is also expected to weigh on thermal coal demand, especially while LNG prices remain near record lows in spot and short-term contract markets. The Japanese Fiscal Year contract price, which serves as a benchmark for the Asian market, is expected to settle at a premium relative to the spot price over the outlook period.
World Trade
World thermal coal trade is expected to contract in 2020 for only the second time this century (the first being 2015). World thermal coal imports are forecast to fall by about 100 million tons a decline of close to 9 per cent, Resources and Energy Quarterly June 2020 report said.
The report further noted that, the fall in seaborne thermal coal demand is expected to be led by India and China. Europe’s coal imports are expected to continue to decline as a part of its longer-term shift away from coal, while demand in Southeast and South Asia is also being affected by COVID-19’s impact on power demand and economic activity. The largest cuts to production are expected to come from Indonesia and the US, although all suppliers will be affected.
In 2021 and 2022, global thermal coal import demand is expected to recover, as the demand-side impacts of COVID-19 ease.
World imports
China’s imports to fall in 2020 despite a strong start to the year, the report said.
As the world’s largest thermal coal consumer and importer, China exerts a profound influence on seaborne markets. China’s thermal coal imports lifted in the first four months of 2020. The initial lift was due to a customs clearance backlog from December (when thermal coal imports reached near zero according to Chinese government customs data), which resulted from China’s efforts to meet its unofficial coal import cap for 2019. The implementation of measures from late January to control the spread of COVID-19 then restricted domestic production, forcing Chinese buyers to turn to the seaborne market. Chinese imports continued to increase year-on-year in April, with low seaborne prices making imports attractive relative to domestic coal.
The office of the Chief Economist’ of Australia further said in its report, China’s thermal coal imports are expected to decline over the remainder of 2020, and annual imports are forecast to fall from an estimated 241 million tonnes in 2019 to 230 million tonnes in 2020. China’s coal import policies will be critical in determining China’s thermal coal imports in 2020 and beyond, with ramifications for the seaborne market. China’s government has actively sought to manage coal import levels over the past few years, since its efforts to restructure its domestic coal industry led to concerns from the Chinese coal industry that imports were being favored over domestic production. Although no official target has been set, China is reportedly seeking to cap total coal imports at 271-281 million tonnes in 2020. Imports increased rapidly in the first few months of 2020 and seaborne prices remain low, making it difficult to achieve this target without intervention. This has increased the likelihood of stricter import measures in the second half of the year.
Thermal coal import policy has been a key tool for stabilizing domestic prices within the ‘green zone’ a price band of 500 to 570 Renminbi (RMB). Prices in this range are understood to be broadly acceptable to China’s power generators and industrial consumers, while also providing sufficient margins for domestic coal miners. China’s government has tended to ease import restrictions when domestic prices are high, and tighten restrictions when domestic prices go below RMB500. In April, China’s domestic coal price dipped below this target range a sign of an oversupplied market but had recovered by June. Any further falls in domestic coal prices would further increase the likelihood of China using thermal coal import policy to restrict imports.
In 2021 and 2022, China’s imports should edge down, with domestic production lifting more quickly than consumption. China has been restructuring its coal sector over the past few years and the replacement of smaller, less efficient mines with larger, more efficient mine capacity should allow production to grow. Domestic production will also be supported by infrastructure improvements and expansions, including the 60 million tonne per annum Haoji railway commissioned in October 2019, which are increasingly connecting domestic supplies with demand centers.
Chinese coal demand is expected to lift in 2021 and 2022, as economic activity and power demand recovers. While the bulk of new installed capacity is likely to come from hydro and renewable generation, China has a substantial pipeline of coal-fired power stations. Between September 2014 and March 2016, China’s central government delegated permitting for coal-fired power stations to provincial authorities, which had strong incentives to approve new coal-fired power stations to meet economic targets for their provinces. Given the pipeline of coal generation projects in China, it is possible that the central government will raise the coal power cap in the country’s 14th Five Year Plan (2021-2025) to be released in 2020. China currently has over 1,000 gigawatts (GW) of operational coal-fired power generation capacity, and state planning bodies have recommended lifting the cap from 1,100 GW to somewhere between 1,200 GW and 1,400 GW. Increases in coal consumption in power generation are likely to be partly offset by falls in coal consumption in residential, commercial and small-scale industry sectors, as a result of China’s efforts to reduce air pollution.
