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Imported coal prices likely to remain subdued for near term

Prices of imported coal are set to remain under pressure as weak rupee will slow down India’s demand for imported coal and thereby improve supplies in the international market. So far this year, prices have fallen by 30%. 

According to Platts, the daily spot price assessment for CFR West Coast India 5,500 kcal/kg net as received thermal coal, on January 1, 2015 the price was $67.35/metric tonne. The price has since fallen to $46.85/metric tonne as of December 9,  a fall of 30.4%.

In the short term, further downside cannot be ruled out — the key downside risk comes from a weakening currency. The rupee is not far from reaching an all-time low against the US dollar. This has historically impacted short-term buying trends in the thermal coal sector and can affect the purchase volumes and the grade of coal sought.

Gareth Carpenter, editorial director — coal at Platts said, “Spot prices of imported thermal coal delivered into India have fallen by almost 30% since the start of the year, mainly due to surplus supply in the global seaborne market, slowing growth in emerging economies, a bleak macroeconomic backdrop and local demand for dollar-denominated coal somewhat restricted by the weaker rupee”.

Coal inventories with power plants are also at high levels and hence rising cost due to lower currency will impact their stocking demand. As of September 30, 2015, coal stock at power houses across the country was 26 million tonnes, which will last 22 days against an inventory of 8.58 million tonnes or 5 days worth of stock on September 30, 2014.
The reasons seen for the same are higher production from Coal India, diversion of e-auction coal to power sector and tepid demand from utilities.

“However, in the long term there are reasons to expect a consolidation of Indian thermal coal prices” said Gareth. The Indian market remains a harbinger of demand hope for imported coal from Indonesia, South Africa and to a limited extent, Australia, amid the fallout from China’s economic slowdown.

Platts Analytics forecasts a 48% increase in coal capacity buildout by the end of 2018 and due to an expected reversal of the decline in load factor in the medium term, the average Indian coal consumption is likely to go up significantly.

Coal India produces 81 % of total coal production in India. According to the company, during 2014-15, coal production was 494.24 million tonnes. In FY16, Coal India hopes to achieve 550 million tonnes production target.

Platts says, “Assuming Coal India meets its production targets, Indian private sector coal production growth still needs to average 32% a year if India is to cut its coal imports to 100 million metric tonnes by FY2018/19. This is unlikely despite the reforms in the mining sector, and could therefore underpin the growth story for imports.”

Indian government estimates import of coal in 2015-16 to be around around 210 million.

However, currently, India is at the center stage of global coal market due to high import demand. Andrew Leyland, Director — Metals & Mining Consulting, Wood Mackenzie, “While coal consumption will continue to grow China is not going to need to take increasing tonnages from the seaborne market. India will be taking centre stage when it comes to balancing supply and demand in thermal coal and the outlook will be driven by growth here”.

Meanwhile, the situation is no different for coking coal as the steel industry, a major consumer, is passing through a bad phase. Coking coal prices have hit an 11-year low this year, hitting $75/mt FOB Australia (as of December 10, 2015) for the benchmark grade Premium Low Vol FOB Australia. Spot prices have dropped by 32% since the beginning of the year due to rapidly declining Chinese demand amidst a continued oversupply market. China, which was the world's largest spot buyer for met coal, saw its imported met coal volumes shrink 24% year-on-year after annualizing for January-October's import volumes.

Edwin Yeo, Managing Editor — Coking coal, Platts, “In terms of recovery, most sources indicated that it would be important to tide through the next few years as the commodities market appear to be experiencing a downturn.  Participants were hoping that India could grow fast enough to fill up the vacuum left by a slowing China though they were also skeptical as to whether it will manage to up their steel production amidst an onslaught of competitively priced Chinese steel exports”.

source: http://www.business-standard.com