Launceston — How much of the current surge in thermal coal prices in Asia is because of a fundamental shift in the supply-demand balance, and how much is down to speculative froth?
This is a question often asked when a commodity experiences a strong gain — or drop — in price, especially when the fundamentals don’t appear to have shifted that much, at least on a casual view.
Virtually everybody in the coal industry can agree that the strong performance in seaborne thermal coal this year is being driven by market dynamics in top importer China. What’s harder to work out is whether this rally will run out of steam or whether there has been a structural change in the market.
The argument for a structural change in China is quite compelling. It goes a long way towards justifying some of the explosive 43.2% rally in spot cargoes from Australia’s Newcastle port in the past three months.
The price has risen from the low so far this year of $71.30 a tonne on May 16 to end at $102.10 on August 18, though it should be borne in mind that the gain since the end of last year is a more modest 9.2%.
The main fundamental reason is China’s increased appetite for imported coal. Inbound shipments are up 18.2% to 152.7-million tonnes in the first seven months of the year compared with the same period in 2016, according to customs data.
Vessel-tracking data compiled by Thomson Reuters suggests August will be another robust month for seaborne coal imports. As of August 20, the amount of coal already discharged at Chinese ports was 15.68-million tonnes, the data shows.
If search parameters are widened to include ships already en route and expected to complete discharging by the end of the month, an estimated seaborne imports of 21.46-million tonnes are due in August — up from the July’s 20.1-million tonnes and the second-strongest month this year behind May.
The increase in imports has come against a backdrop of efforts by Beijing to curb excess coal mining capacity by closing unviable mines.
This is a structural shift aimed at boosting the efficiency of coal mining in China, but not necessarily at cutting output.
Coal production in the first seven months of 2017 was 5.4% higher than the same period a year ago at 2-billion tonnes, according to official statistics released on August 14.
While this suggests domestic coal output is robust, to some extent it is still recovering from last year’s decline, caused by official restrictions on the number of days mines could operate.
It is also worth noting that July’s coal output of 294-million tonnes was the lowest since October and down 4.5% from June, with environmental restrictions, safety checks and a crackdown on illegal mines cited as reasons for the drop.
The rise in coal output this year has largely been matched by increasing demand from electricity producers. Thermal power generation has grown 7.8% in the first seven months of the year.
This was largely because hydropower was curtailed earlier in the year, with hydro generation dropping 3.4% in the January-July period.
The decline in hydro isn’t a structural change, and its likely recovery, together with rising output from nuclear and renewables such as wind and solar, may result in growth in thermal generation slowing in coming months.
Overall, it appears coal in China is being subject to competing structural influences.
On the one side are ongoing attempts to limit domestic output by closing inefficient mines and stopping illegal mining.
On the other are efforts to limit consumption by more stringent environmental requirements and moves to cut excess capacity in coal-consuming industries such as steel and cement.
In an ideal world, these two efforts would largely work in tandem, with lower output growth being offset by reduced consumption growth.
The reality is more messy. It’s this dynamic that allows for seaborne imports to be price-competitive and in greater demand.
It’s still far from certain that the structural changes in China’s coal production and consumption will be bullish for imports in the longer term.
It’s highly doubtful that the authorities in Beijing want to import more coal on a sustained basis, meaning the current increase in imports, and prices, probably has a limited, but indeterminate life span.
The current rally in prices does seem largely justified by the fundamentals of increased Chinese imports, but expecting it to continue would be a brave position to take.