Price surge a blip in coal’s decline
The march of coal prices to eight-month highs, driven by China’s appetite for power consumption, looks like an interlude in a longer-term decline.
The march of coal prices to eight-month highs, driven by China’s appetite for power consumption, looks like an interlude in a longer-term decline.
Investors widely expect a slow demise for coal use because of policies that encourage cleaner natural gas and renewable energy, but there has been a sharp reversal of fortunes in the shorter-term outlook for the sector.
Asia’s benchmark physical coal prices have gained more than a third from lows in May to nearly $98 per tonne, while European benchmark API2 2018 coal futures are at eightmonth highs near $74 a tonne.
Recent gains are largely due to high demand in China, where power consumption has jumped more than 6% since the beginning of 2017. In July, torrential rains forced China to cut capacity by as much as two-thirds at its Three Gorges and Gezhouba hydropower plants to ease pressure on the Yangtze River, forcing utilities to switch to coal.
Three Gorges has an installed generation capacity of 22.5GW — equivalent to about 20 coalfired power plants.
Heatwaves in the north boosted the demand for airconditioning , while coal mining and shipping were hampered by adverse weather in Indonesia and SA while production in Australia was disrupted by a strike.
“Downside [to prices] is likely from the end of August, but a lot depends on China,” said Wayne Bryan, analyst at Alfa Energy.
China’s decision in 2017 to cap mining output resulted in a sudden surge in overseas orders by its utilities and triggered a price spike. But there have been several policy changes since, contributing to a price slump in late 2016 and earlier in2017.
Singapore-listed commodity merchant Noble Group, a major global coal trader, reported a $129.3m loss in May.
China had cut coal capacity by 111-million tonnes by the end of June, representing 74% of its target for 2017.
“China is likely to continue the consolidation of its coal mining industry yet will probably try to avoid production being slashed in the way that happened in the past,” analysts at Commerzbank wrote.
“We regard the latest price rise as merely an intermezzo and expect coal prices to fall again in the second half of the year,” they said.
Analysts expect average futures prices to fall to $60-$70 a tonne in the third and fourth quarters of 2017 and to $50-$65 a tonne in the first quarter of 2018.