There's still life in coal
Recent falls in the price of coal were due to increasing supply rather than declining demand
International coal prices have fallen sharply over recent months. The spot free on board (FOB) price of coal shipped from Australia's Newcastle export terminal stood at $72.50/t on 13 June 2019, 40pc below a peak of $120/t reached in July 2018.
By the end of last year 30 countries had joined the Powering Past Coal Alliance, a group committed to moving from coal power generation to clean energy.
At Perret Associates we expect to see a global surplus of 24m tonnes of thermal coal in 2019, set out in our latest Long Term Steam Coal Forecast. This compares with a deficit of 25mn tonnes at one stage in 2018. Overall, we anticipate that total steam coal imports will fall by 13mn tonnes in 2019 to 1.013bn tonnes.
At first sight, it might look like the final nail is being firmly driven into the coffin of one of the world's most polluting fuels.
However, appearances can be deceptive. The declining level of global imports would still be the second highest since our records began in 2000, and only slightly below 2018's peak of 1.027bn tonnes. The 40pc price fall since July does not seem as significant when one considers it was measured from a seven-year high.
The slump in international prices since Q3 2018 cannot simply be attributed to a decline in demand. Rather, it was an increase in supply that triggered the downturn. More precisely, it was the speed with which a relatively small decline in global demand happened that wrong-footed the world's biggest coal exporters that tipped the market into oversupply.
We currently expect total steam coal exports to increase by 16mn tonnes in 2019 to 1.038bn tonnes (so the difference with imports, 25mn tonnes, will be added to global stockpiles). This would be the highest they have been since our records began.
Despite a much-documented effort to "turn the skies blue again", Chinese steam coal imports have held up better than expected since the beginning of the year. While power generation growth has slowed, there has been solid demand from heavy industry as well as some restocking activity in the run-up to the peak summer cooling season.
We now expect China to import 195.2mn tonnes of thermal coal during 2019, up by 8.5mn tonnes from the prediction in our February 2019 report. This is still below 2018's imports of 212.8mn tonnes.
After a flat start to the year, Indian coal-fired generation has risen sharply over recent months. This was in large part due to previously stranded private power plants being allowed to increase electricity tariffs to cover higher fuel costs. This resulted in a big rise in coal imports, which was further boosted by strong coal demand from the country's buoyant cement and sponge iron industries. We forecast an increase in 2019 imports of 10mn tonnes to 170.9mn tonnes, although a significant rise in domestic coal production and robust hydro generation this summer could put a cap on imports.
A mild winter has contributed towards a slack start to the year for the other two major Asian importers, Japan and South Korea. A rebound in nuclear power generation, as well as government environment policy, has also weighed on coal-fired power generation. Even so, we still expect that both countries' imports will remain resilient this year, declining only by a marginal 1mn tonnes apiece to 132mn tonnes and 116.5mn tonnes respectively.
We expect Taiwan's imports to edge up slightly to 70mn tonnes.
Increasingly, it is the world's developing Southeast Asian economies that are driving coal demand. We expect Malaysia, the Philippines, Vietnam, Thailand and Pakistan to account for a combined rise in coal demand this year of 13.1mn tonnes to 133.2mn tonnes, on the back of soaring growth in power demand as well as industrial production.
Overall, we anticipate that India/Pacific imports will increase by 3mn tonnes to 843.7mn tonnes in 2019 compared with last year.
European coal demand remains in structural decline. Western European countries have been lining up to declare their coal power phase-out plans; one of the most significant recent announcements was made by Germany. The Coal Commission, established by the government to map the country's exit from coal, recommended earlier this year that Germany's entire 42.5GW of coal- and lignite-fired generating capacity should be closed 2038.
We anticipate that EU15 imports will hit a new low at 79.4mn tonnes in 2019, down a hefty 17.7mn tonnes from 2018. This decline in European demand is not just down to environmental concerns. In fact, hard economics have played a significant part in the sharp drop in coal-fired power generation over recent months in the shape of intense competition from another fossil fuel - natural gas.
Increasingly, it is the world’s developing
Southeast Asian economies that are driving coal demand
Gas-fired generation margins have become more competitive than those of coal, not only for peak but also for base-load generation, which has only rarely occurred before. This could remain the case until the end of 2019, due to record-high deliveries of LNG from the US and elsewhere.
Weak Asian demand-due to the mild winter as well as a sharp drop in demand from China, which stocked up early in 2018-caused a reversal of the traditional premium of Asian over European gas prices in March. This made the European market a more attractive destination for LNG suppliers, especially those based in the US.
This, combined with the commissioning of several new gas liquefaction facilities, resulted in a wave of LNG deliveries and pushed European gas prices to multi-year lows. On top of this, a mild European winter and high CO2 certificate prices weighed on fossil fuel fired power generation in general, but especially coal power.
Previously one of the few pockets of demand growth in the wider Europe/Mediterranean region, Turkish coal imports have been impacted this year by an economic slowdown, as well as a government decision not to build any more plants running on imported coal.
The increase of 16mn tonnes in world exports we are forecasting for this year is mainly due to an expected 25mn tonnes jump in Indonesian shipments, which could hit a new record of 453.3mn tonnes. Despite the Indonesian government's declared intention to cap and control production, most of the country's producers are planning to increase output in 2019. Meanwhile, domestic demand is also not increasing as quickly as expected, enhancing the appeal of the export market.
One of the biggest uncertainties on the supply side is the speed and the scale of the potential drop in US exports this year. According to our estimates, at current spot prices almost all US coal mines are operating below their cash cost of production. Consequently, we expect US coal exports could fall by at least 10mn tonnes in 2019 to 42mn tonnes.
1,013mn t - Total steam coal imports
However, a supply response from other exporting countries to this year's big fall in international prices might not materialise until H2 2019 or H1 2020, as prices would need to fall further to significantly dent the profit margins of Russian and Indonesian suppliers.
Even if world coal imports do fall marginally in 2019, by the 1.2pc year-on-year we anticipate, 1bn tonnes of coal imports/exports should not be taken lightly. While it is perhaps not exactly alive and kicking, at least in Europe, the international coal market is still clearly a long way from death's door.
GUILLAUME PERRET is the founder and a director of Perret Associates.