BHP Commentary & Forecast for Thermal Coal
Australian mining giant BHP said that energy coal prices were weak in the second half of financial year 2020. The gCNewc 6000 kcal/kg FOB Newcastle index (hereafter 6000kcal) averaged around $61/t over the half, down from around $68/t in the first half of financial 2020. Prices ranged from a high of around $74/t to a low of around $50/t. That is below the 2015/16 trough in real terms. Based on the Wood Mackenzie operating cost curve, more than half of seaborne supply (comprising all grades of energy coal) was likely experiencing negative margins with 6000kcal prices in the low $50s. The 5500kcal index averaged around $49/t over the same period, with a high of around $58/t and a low of around $38/t, which was where it closed out the half year. The spread between the spot indexes for gCNewc 6000kcal and 5500kcal reverted to historical average of close to 20 per cent in the second half of financial year 2020, down from around 30 per cent in the 2019 calendar year.
While not directly relevant to our business, there was a compression of spreads between the lower grades of energy coal (the 5000, 4200 and 3400 gross–as–received29 kcal brackets) as prices traded deep into the cost curve. Supply has been “sticky” in most export jurisdictions, with the exception of Indonesia, where output has been materially lower. Indonesian supply is prominent in these lower quality brackets. Developed Asian markets, who are the largest buyers of >5500kcal product, have been weak under the shadow of COVID19. Japanese imports contracted by 3 per cent YoY in the first half of the 2020 calendar year, while power demand was down 4 per cent YoY, South Korean imports contracted by 11% per cent.
Chinese demand for seaborne energy coal rebounded as lockdowns were lifted, with consumption of coal at coastal power plants back in the normal seasonal range by April 2020. Hydro generation has been inconsistent, along with the weather, with dry conditions early in the year then giving way to floods. The market consensus has been that the 271-281 Mt import inflow registered in calendar years 2017 and 2018 would serve as an informal objective for total coal imports (including metallurgical and lignite) in calendar 2020, rather than assuming that the jump to around 300Mt in 2019 was the new norm. Enforcement of quotas by month and by port, including clamping down on the practice of trading firms clearing customs at one port but discharging at another, have been somewhat effective. Even so, with so much product being forced to clear to China under the Great Lockdown, some provinces and individual ports had already exhausted full year quotas by May.
India saw a sharp decline in energy coal imports in January-June 2020 (Minus 27 per cent YoY). Power demand declined by 7 per cent YoY in the same period, while domestic coal output was quite resilient, at 3 per cent YoY.
Demand from the Atlantic and Mediterranean regions was weak in advance of COVID19 and lockdowns have deepened the malaise. In calendar 2019, the weakness reflected commercially driven coal to gas switching in parts of Europe, where relatively cheap pipeline gas and LNG imports, plus a steep rise in the price of European Carbon Allowances (ECAs)30, have driven generator behaviour. In calendar 2020 to date, all of these factors have remained in place and in some instances they have been amplified by COVID19: and demand for power itself has now fallen sharply. Renewables have been able to take a larger share of that shrinking pie.
Longer term, we expect total primary energy derived from coal (power and non power) to expand at a compound rate slower than that of global population growth.
Coal power is expected to progressively lose competitiveness to renewables on a new build basis in the developed world and in China. On a conservative estimate, the cross over point should have occurred in these major markets by the end of this decade. However, coal power is expected to retain competitiveness in India, (where the coal fleet is only around 10 years old on average: one quarter of a normal lifetime), and other populous, low income emerging markets, for a much longer time.
Source : STRATEGIC RESEARCH INSTITUTE