Supply Constraints Driving Coal Price Recovery in 2020

Wattsight long-term coal price forecast
Editorial
Jan. 14, 2020Guillaume Perret

As 2020 gets underway there are signs that the support that international coal prices found at the tail end of last year could just be a foretaste of a market recovery in the year ahead. Although demand looks set to remain largely subdued, tightening supply, especially in the Atlantic market, could boost prices after their heavy fall in 2019.

In the December update to its Long Term Price Forecast Steam Coal and Freight 2020-35, Perret Associates (PA) foresees a continuing shift in the balance of supply and demand from a global surplus of 28mt at the end of 2019 to a shortage of 12mt in 2020. The 2019 surplus is mainly down to an estimated 32.2mt plunge in EU15 imports last year to just 63.8mt. PA expects EU15 imports to continue to fall thereafter, reaching 53.8mt in 2020 and 43.6mt by 2025.


In addition to environmental pressures, this decline in coal use owes much to highly competitive gas prices, due largely to a glut of LNG deliveries, which could result in coal-to-gas switching to continue into 2021 and only the most efficient coal power stations remaining in operation.


Offsetting the structural decline in European demand, India/Pacific imports are expected to jump to 858.7mt in 2020, up 16.7mt from an anticipated 842mt last year, and to continue rising until 2022.


North-east Asian demand should remain capped, due to stricter environmental regulation as well as market pressures, and Chinese imports are also projected to fall by 13mt in 2020 to 214.1mt.


On the flip side, Perret Associates sees Indian imports rising strongly to 184.1mt in 2020 on the back of restocking activity after last year’s shortfall in domestic production, as well as renewed economic growth. The surge in Vietnamese demand also looks set to continue, albeit at a more modest rate.


Taken altogether, PA sees world seaborne imports stabilising in 2020 at just over 1bn tonnes, up 10mt, after an estimated 30mt plunge in 2019, on the back of weak European demand.


However, the research firm expects the biggest shift to be on the supply side, with total steam coal exports potentially falling by 30mt in 2020. This would be mainly down to lower US and Russian exports, as producers in those countries are forced to finally throw in the towel after operating well below their cash cost of production for much of 2019.


Indonesian exports are expected to remain flat this year, amid renewed rumblings from the Indonesian government about capping output to support international prices. Perret Associates also sees little upside in exports from the other main suppliers, Australia, South Africa and Colombia.


On top of this, rising crude oil prices also look set to add to producers’ costs, amid rising tensions in the Middle East, especially between the US and Iran.


The Richards Bay rally, which was initially triggered by a genuine supply shortage for Indian sponge iron producers (low-quality steel) and probably exacerbated by a few large mining companies’ reluctance to sell, also triggered some reloading activity from ARA to other destinations, which could also help to rebalance the Atlantic market.


More broadly, PA expects 2020 to usher in the return of massive government stimulus programmes in support of economic and employment growth. With GDP growth stalling across the globe despite ultra-low interest rates, many governments will want to avoid a potential recession, or even worse, stagflation.


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