Commodities | Oct 06 2020
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A tightening market has procured a rebound in coal prices, likely to hold up with a wet and stormy Australian summer ahead, but uncertainty prevails for the long-term.
-Floor under coal prices as demand recovers
-La Nina event signals potential for price spikes
-Bearish outlook prevails for long-term coal-fired power
By Eva Brocklehurst
Is coal on the rebound? Demand appears stronger and supply reductions have underpinned a tightening market. Certainly, the Newcastle thermal coal price has been reinvigorated, with Morgan Stanley noting a recent rally generated by an increase in spot buying from Chinese end-users.
The thermal price, having been around US$50/t since early May, has risen to US$55.50/t. Still, the broker assesses developments in China are somewhat confusing.
Customs authorities in Shanghai are contemplating a ban on coal discharging in the final months of the year while some in southern China have secured additional clearance quotas. China is aiming to limit coal imports but domestic production is also constrained because of the clampdown on illegal output.
This has generally tightened the market. Power generation from coal for key importers such as India, Japan and South Korea is returning to normal, although high inventory could limit the level of winter stockpiling in the broker's view.
Meanwhile, Glencore is curtailing supply in Australia and in June, Morgan Stanley points out, almost half seaborne coal exporters were loss-making, although this has reduced to around 15% at the spot price. Hence, a lapse in supply discipline and a quick return of curtailed capacity could put the recent recovery at risk.
On the metallurgical (coking) coal front, Australia's hard coking coal price has risen to US$139/t, also sustained by Chinese buying and a recovery in steel production. India's steel production is almost back to normal, Morgan Stanley observes, although coal imports have not kept up with output.
The broker believes a floor is settling under both coal pricing systems but favours metallurgical over thermal coal as there is a more robust recovery in demand, less inventory around, and potential for seasonal supply disruptions ahead.
So, what about the weather? The Australian Bureau of Meteorology has assessed a La Niña event now prevails in the Pacific Ocean. This signals higher rainfall on the eastern seaboard over the next few months.
As the number of tropical cyclones is also likely to increase, this brings the focus of risk to the largely metallurgical coal basins of Queensland. Credit Suisse assesses a risk of price spikes for coal in the event of supply disruptions and insufficient inventory, given improving demand.
While Australian coal producers are better equipped to deal with severe weather these days, having invested in mitigation, the extent and location of events are difficult to predict adequately.
The Bowen Basin coalfields are the most exposed to severe rain events from tropical cyclones, Credit Suisse notes, while further west base metals operations could be hampered by disruptions to Queensland rail networks. Hence, steel mills and coal traders are likely to be watching the weather closely, to ensure they are ready in terms of sourcing required volumes of metallurgical coal.
Higher prices will come from further tightness in the market, while the downside for miners occurs with interruptions to production amid requirements for remediation and maintenance after flooding.
All up, the broker envisages severe weather is likely to add to demand and improve pricing, and the best way to play this scenario is via Coronado Resources ((CRN)). Larger names include BHP Group ((BHP)) and South32 ((S32)), both of which have significant exposure to Bowen Basin coal. Earlier in 2020, BHP Group's large Blackwater, mine was heavily affected by flooding of pits and haulage roads.
From a bearish perspective, UBS points out in the first half of 2020 global coal-fired power capacity shrank for the first time ever, affected by ageing generation fleet in developed economies and better renewable economics. A glut in LNG and evolving public and lender views that are negative on coal also helped.
The retiring of old power plants continues unabated while renewable sources of energy are forcing coal power generators to cycle, which makes them less economic. Moreover, since 2015, the broker notes there has has been a sharp drop in the amount of new coal power capacity being planned or constructed.
After hosting a call with the founder of Global Energy Monitor, UBS highlights that to achieve the goals of the 2015 Paris Agreement, closures of coal-fired power production will need to accelerate.
The IPCC (Intergovernmental Panel on Climate Change) indicates a near-total reduction in coal use for electricity generation is required by 2050 to limit global warming to 1.5 degrees above pre-industrial levels and to avoid more extreme weather.
China is restricting new coal plants and India prioritising renewables, while Korea and Vietnam intend to switch more coal-fired power to gas over the next 10 or so years. China, which produces more than 50% of global coal-generated power, has indicated its emissions will peak before 2030 and expects to be carbon neutral by 2060, considered a significant target.
Does carbon capture present upside for coal? UBS notes the benefit of clean coal technology is limited at present, while recent studies suggest carbon capture is ineffective and expensive, and probably will not offset emissions from coal in the required timeframe.
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