China thermal coal prices under pressure, India to gain ground in 2020
Chinese thermal coal prices are likely to come under pressure in 2020 from rising domestic output, while India makes further gains in its quest to surpass China as the world’s largest thermal coal importer.
India’s increased demand for imports, which is due largely to domestic production and transportation challenges, will likely come at a time of subdued import demand growth from China, where domestic supply is expected to increase 5% next year, China-based energy analyst Guo Chaohui told S&P Global Platts.
Guo expects China’s total coal demand growth to dip to 2.5% in 2020 due to weakening economic activity from 3.8% in 2019, while competition from natural gas and renewables will also rein in coal demand, he said.
“The process of de-capacity for the coal sector is likely to weaken next year and production levels will be increased, so this will keep domestic prices subdued,” Guo said.
CHINA’S NEW TARIFF SYSTEM
Some market sources expect a new tariff system from January 1 will provide some support for coal imports and put domestic prices under pressure. China has announced plans to scrap its coal-electricity price linkage mechanism from next year in a bid to keep raw material and electricity prices low.
“Imported coal is always cheaper than domestic cargoes, so if there’s no restrictions, import volumes will keep increasing,” a trader in east China said.
However, domestic prices are likely to remain subdued next year and if cheaper imports add further pressure and domestic producers are seen to be hurting, authorities may tighten their grip on imports, the trader said.
“The seaborne market is still largely subject to China’s import policy as China is trying to keep import volumes in check,” Guo said.
“It’s difficult to foresee how the policy will be, but if domestic prices are high, it’s likely that import controls will be less stringent, while the curbs will be tighter if domestic prices are low,” said Zhang Feilong of Yi Mei Net.
Despite the potential for an uptick in imports, Platts Analytics projects China’s thermal coal import volumes to fall 1.8% year on year to 215 million mt in 2020 due to higher domestic production displacing demand for imported coal at coastal power plants.
Increased power generation and transmission from central and western provinces to coastal areas was also expected to displace seaborne coal demand, Platts Analytics said.
INDIA DEMAND STRONG
With China’s growth expectations tempered, suppliers will likely turn to India, which the International Energy Agency said in its latest World Energy Outlook report will likely overtake China as the world’s largest coal importer by the mid-2020s.
“However, there are uncertainties over how the supply-demand balance in Asia plays out,” the IEA said. “Among exporters, Australia and Russia could take advantage of any new export opportunities, as Indonesian exports decline.”
India’s strong demand for seaborne thermal coal will be encouraged in 2020 due to bottlenecks in rail deliveries and domestic production issues, according to Platts Analytics.
“We do not project a considerable increase in Indian domestic coal production in calendar year 2020, increasing only 26 million mt year on year to 735 million mt, which should underpin continued import demand growth,” Platts Analytics said.
PRODUCERS ADDRESS OVERSUPPLY
On the supply side, both Australia and Indonesia are projected to lower exports in 2020 as producers try to address an estimated 60 million mt supply overhang in the global market, according to Platts Analytics.
Platts Analytics projects that Australian exports will slip at a faster pace next year than in 2019, falling 7 million mt year on year in 2020 due to the persisting low price environment.
“We believe Australian producers will look to produce higher quality, high CV coal, which will decrease yields in run-of-mine production coal. This will see lower overall production of marketable coal, as well as exports of lower CV high ash Australian coal in 2020,” said Matthew Boyle, lead coal analyst at Platts Analytics.
Meanwhile, Indonesian exports will likely come in 2.3% higher on year over the fourth quarter and in Q1 2020, with Indonesian miners looking to new demand markets in India and Southeast Asia, but total exports in 2020 were seen likely to fall 2.8% on year to 435.9 million mt.
“Indonesia will increase year-on-year its domestic market obligation requirements in 2020. However, with our expectation of lower seaborne thermal coal prices in 2020, this will place pressure on higher cost or marginal coal production, which will limit production and export potential,” Boyle added.