Thermal coal: key trends in 2013 and 2014

2013: Too much supply and not enough Chinese interest

2013 was not a good year for seaborne thermal coal.  While prices rallied late in the year, this was from very low levels and are still well below where many would have talked about cost support a couple of years ago.

The first big problem in 2013 has been that supply growth has been very strong.  Total exports are likely to be up ~8% for the year as a whole, although growth has moderated in the latter stages of year.

A moderation in exports from key Atlantic producers in particular was one of the key factors supporting the recovery in prices seen in the late stages of last year, with exports from Colombia, US and South Africa down 7%YoY YTD.  In particular, exports to Asia are down sharply, while exports to Europe have also slipped. Somewhat higher exports from Russia into Europe and a surprising increase in availability from Poland has helped keep the European market close to balance.

The other critical factor supporting the recovery in prices was the need for restocking in China heading into the end of the year.  Inventory fell sharply through the summer and stronger coal burn rates in October and November saw domestic prices rise and arbitrages into China open up.

This, however, now appears to be turning.  Coal burn rates have slowed dramatically into the end of the year, with the top down macro picture looking sluggish heading into Chinese New Year. Coal prices have already rolled over.

Slower export growth and higher Chinese requirements did mean that China needed to lift domestic supply availability out of ports in late 2013.  This was partially achieved through destocking, although for the year as a whole it is important that coastal supply, which is the highest cost part of the domestic supply chain, was quite a bit stronger despite weaker prices.

In particular, Huanghua, which is operated by Shenhua, saw a huge increase in shipments, while the Tangshan ports also gained as railings on the Daqin corridor improved.  Smaller ports with more difficult logistics saw a notable decline as did trucking of coal into Tianjin.

When adding net imports into the total coastal supply picture, its clear that most of the growth came from domestic shipments, with imports estimated to be up ~5% over the year.

Total coastal supply doesn't appear to have increased by a huge amount, rising ~55-60mt. But coal burn in coastal regions was not particularly strong either.

The defining factor for the seaborne market in the last couple of years still appears to be the huge miss on estimated Chinese demand.  Relative to forecasts made in 2012, coastal coal burn in 2013 is ~100mt lower than forecast.

With supply logistics improving into Chinese ports and mine costs proving to be more flexible than many anticipated, this has helped keep coal prices low.

If China's pull on imports wasn't particularly strong this year, then where did all the seaborne supply go?  Japanese demand was quite a bit better in 2013, but the bigger driver was the increase in Indian imports, which were up ~26mt to 136mt in the calendar year.  

This strength hasn't been because top down power generation has been strong, with the macro picture poor this year.  Rather it has been because more units at import-dedicated plants have been online for the full year.  Total thermal generation from IPPs has been up a chunky 35% in 2013, compared to a 5% increase in total generation.

The problem here for 2014 is that the majority of the gains in import-based coal generation have already occurred and there is not a lot of additional capacity that will be online this year. Growth in demand from this sector will be slower.










What does this mean for 2014?

The seaborne market enters 2014 looking somewhat balanced at current prices, although there are some concerning signs coming from China.  Its hard to know how persistent much slower coal burn in China will be, but it seems less likely than previous years that policy will quickly reverse to support growth.

Furthermore, logistics into Chinese ports should improve further in 2014.  Huanghua is aiming to expand to 200mt of capacity by mid-year, while the Daqin is aiming for an additional 15mt this year. The Mengji rail line, connecting Inner Mongolia to Caofeidian port, is also meant to be completed 2014 So the China balance, at this stage is looking soggy for the year as a whole.

Seaborne supply growth should slow quite a bit.  Australian export growth should be closer to 8mt than the 16mt in 2013.  Indonesian supply growth should also slow, with considerable uncertainty around the ~120mt of small mining.

That said, demand growth ex-China should slow as well. There is much less capacity in India coming online for the full year 2014, while weak growth and a wobbly rupee won't see a rush of other buyers to supplement or replace domestic coal supply. Japan is also likely to be much flatter this year, while there isn't too much happening in the Atlantic.

So it doesn't look like a year where prices will be trending higher, but on the flipside they are unlikely to be falling drastically over the year as a whole.  While the average for prices might be sideways there will be plenty of good trading opportunities with those with shorter time horizons.

Right now it seems likely that prices will fall and perhaps unwind the gains made through mid-year, with a poor Pacific market outweighing some of the concern created by supply disruptions in the Atlantic.