30-08-2016

Thermal coal market analysts pinpoint Southeast Asia region for standout growth

TCP

Southeast Asian countries including Malaysia, Thailand and Vietnam are seen as growth markets for the consumption of imported thermal coal in the years out to 2020, as coal-fired electricity is used to fuel their fast-growing economies, said analysts at the 11th Coaltrans Australia conference in Sydney last week.

In a 10-year outlook for the Asia seaborne thermal coal market, Mark Gresswell, chief analyst at Australian mining consultancy group HDR Salva said three-and-a-half billion people are living on electricity consumption below the level in Japan.

“Eight of the most populous countries are in Asia, and 54% of the world’s population live in Asia,” he said.

To move these people to Japanese levels of power consumption will require an extra 4,300 TW of electricity generation.

This step change in levels of power generation in Asia will require an 80% increase in global coal production.

Coal-fired power generation is a relatively cheap source of energy at $30/MWh, and is less than half the cost of generating electricity from gas at $65/MWh, said Gresswell.

“This is why coal will have a big role to play in Asia,” he said.

Nuclear electricity generation has come under scrutiny in Asia following the tragic accident at Japan’s Fukushima-Daiichi plant in 2011, and some Asian nations have lowered their projected share of this fuel in their future generation mix.

Japan’s long-range plan is to draw 20%-22% of its electricity production from nuclear plants, and South Korea has a target for nuclear power generation of 30% by 2030, down from 41% previously.

“Local communities are very concerned about having nuclear plants in their backyards,” he said.

And, the only real alternative fuel to nuclear is coal, he stated.

MARKET IN TRANSITION

Gresswell characterized 2016 as a year as a year of “transition” for the seaborne market for thermal coal, as it moves from a supply surplus to a supply deficit that will likely lead to a recovery in prices.

“We are seeing large tonnages of Colombian coal moving to Asia,” said Gresswell, adding this new trade was emblematic of demand growth in Asia drawing tons to the region.

In China, imported thermal coal is competing strongly with Chinese coal, and Beijing’s tough stance on capping domestic production is being backed up by mine inspections that could result in some closures of local mines, he said.

Southeast Asia holds the promise of becoming the next India, in Gresswell’s eyes, as countries in this region seek to diversify their fuel supply arrangements for electricity generation which is growing at a current rate of 12% per year.

For example, Vietnam’s imports of thermal coal could grow to 147 million mt by 2030 from 63 million mt in 2020, he said.

The country is aiming to build 46 new coal-fired power stations ranging in size from 40 MW to 600 MW in capacity.

Fully, 50 GW of new coal-fired power capacity is set to come online in Southeast Asia in the next few years to 2020, and will require an additional requirement for the region of 100 million mt of imported thermal coal, said Gresswell.

Indonesia alone will need to consume an extra 80 million mt of thermal coal for its additional 20 GW of coal-fired power plants by 2020, and most of this supply could come from the country’s domestic market.

Given this additional demand growth for thermal coal in Southeast Asia in the coming years, it is difficult to see where the region’s additional requirement for 100 million mt will be sourced from.

“There may be some latent tons from the US. Australia is almost tapped out,” he said.

Speaking later in a panel discussion, Gresswell expanded on the theme of supply relating to Australia.

“There are no new mines being developed [in Australia]. There are some small expansions, but they are offset by closures,” he said.

“Higher prices will incentivize a few additional tons onto the market, but it won’t reach 150 million mt,” he said.

MORE INQUIRIES FROM SE ASIA

Also during the panel discussion, Sam Fisher, general manager for marketing at Australian coal producer New Hope Coal said: “As a coal producer in the last 12 months we have seen a lot more inquiries coming from Vietnam, and also some inquiries from the Philippines and Malaysia.”

India was an arbitrage market for Australian thermal coal that greatly depended on freight differentials, he added.

Gary Vernon, global head of coal trading for Australian bank Macquarie said: “With a low freight environment, Australian coal competes everywhere.”

There has been a significant increase in South American demand for Australian thermal coal because of lower vessel freight rates, he said.

Matthew Boyle, principal consultant at commodities analysis and consultancy firm CRU said Australian coal exports had stayed relatively flat, possibly as a result of take-or-pay contracts for rail and port infrastructure used by Australian coal producers.

In China, the central government’s policy to restrict domestic coal mines to operating for only 276 days in a calendar year had been a “significant driver” in the recent improvement in prices in the Chinese coal market.

“Not only is it being implemented, but at rates we did not expect,” he said of the production restriction.

But, in driving domestic thermal coal prices higher, Beijing’s production policy could have an unintended side effect.

“Now, with [domestic] prices getting close to Yuan 500/mt [FOB Qinhuangdao for 5,500 kcal/kg NAR thermal coal] there is the potential for some cut production to come back online,” he said.

China’s domestic coal industry is “massively fragmented” with 10,800 individual mines spread over the country, and 7,000 of these have a capacity of under 300,000 mt/year.

“The smallest mines only make up 10% of production,” he said.

Beijing is aiming to eliminate 500 million mt of production capacity in China’s domestic coal industry over a three-to-five year period, but even if it was to achieve this outcome, it would not be enough to improve the sector’s overall profitability, he said.

For Japan, which restarted its fifth nuclear power reactor a couple of weeks ago, its coal demand is forecast to be 130 million mt by 2020 and focused mostly on imported fuel with an energy content of more than 5,700 kcal/kg NAR, said Boyle.

South Korean import demand for thermal coal was seen by Boyle as staying relatively steady at around 85 million to 90 million mt/year.

Southeast Asia is also viewed by Boyle as a bright spot for thermal coal demand and the region is expected to require an additional 65 million mt of higher-grade bituminous thermal coal by 2020.

“We are extremely positive on thermal coal demand in Southeast Asian countries,” he said.

“Most of the demand for thermal coal will come from Malaysia and Thailand and will continue out to 2020,” he stated.

China is starting to retire some older coal-fired power stations and for environmental reasons, leading to 137 GW of generating capacity for this fuel being taken offline by 2020, although the country will add 23 GW of coal-fired electricity generation in 2016 alone, he added.

India’s imports of thermal coal were projected to be 65 million to 70 million mt by the year 2020 by Amit Kumar, head of coal sourcing and power trading at Jindal Steel & Power.

Though he said he believed there would be a shift to higher calorific value thermal coal in the years ahead, that would offset declining trade volumes.

“Sponge iron and cement plants will continue to import coal from South Africa and Australia,” he said.

Coastal power plants in India with a combined generating capacity of 10 GW to 12 GW will remain dependent on imported cargoes too, he added.

Source: Platts 

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