Since the start of 2016, global coal benchmarks have been on a two-year upward run. Front-month coal has traded up towards the 100 $/t mark and Cif ARA has stayed above 80 $/t for the last four months, trading as high as 95 $/t.
The key to the changing fortunes of the coal market in 2016 was a change in Chinese policy that boosted the country’s need for imported coal. Restrictions were placed on mines in China to only operate for a maximum of 276 days a year.
Over 2017, the global coal market has continued to tighten. China leads the way in terms of import demand, adding an expected 25 Mt y/y to come close to 200 Mt of imports, with the rest of Northeast Asia adding around 15 Mt y/y.
As a result, the seaborne thermal coal trade is now pricing at the very high end of its marginal cost supply curve, where incremental volumes only come in at high-priced increments. This section of the curve is largely dominated by US coal volumes, which are high-priced due to relatively high costs of mining activities and the transportation of product to export terminals.
In terms of global coal supply, there are very few new coal mines being opened. Investments have been hindered as investors shy away from coal stocks due to its high environmental costs, while the low prices of the 2014-2015 years meant that very few new projects looked economically viable. Thus the supply side is unlikely to offer much new coal, with high prices simply incentivising the export of more Indonesian and US coal rather than resulting in higher global supply.
Demand growth markets in 2018 are likely to include South Korea, Malaysia and Indonesia, with upside potential also coming from Pakistan and India. These countries could add a combined 20-30 Mt on the demand side. On the contrary, there will be some gradual reductions of imports from Europe, although the removal of more than 10-15 Mt of demand is unlikely.
Any significant shifts in the supply-demand balance will rest with whatever China does with regards to its domestic coal supply. The market would price back towards 60 $/t if there is a shift down in Chinese import demand by 50 Mt in 2018 and a net 15 Mt gain y/y in seaborne coal demand from the rest of the world.
The main implication for Cif ARA staying in the 85-95 $/t region in 2018 and 2019 is that most of the fuel switch in Europe is likely to be realised with gas prices around 12 €/MWh (4.1 $/mmbtu) at the TTF. With global LNG prices converging ever closely with those TTF prices, it also suggests that global prices could be pushed down towards that level.