Bears in the coal market

Thermal coal prices are globally under immense pressure as demand recedes in key markets and trade tensions continue between Australia and China (read: “China market: coal out in the cold, Mar 21,2019). In certain markets, ample availability and use of cheaper natural gas has thwarted demand for coal and other energy sources while Australian coal shipments are being re-routed away from China to other Asian countries at much lower prices. Experts believe it may be China’s way of retaliating for Australia’s move to block Chinese telecoms company Huawei from building a 5G network. These two factors are single handedly helping coal prices to plummet. Coal miners are getting hit the worst.

Coal demand is undeniably down. Analysts argue that Chinese companies are buying local coal and using gas for power generation. Japanese buyers have locked in supplies with long-term contracts but there is also its own waning interest in coal due to environmental concerns with many Japanese firms moving away from thermal coal. This has reduced demand in that market. The Japanese environment minister recently promised he will not approve any new coal-fired power plants. Meanwhile, Korea has upped the ante by imposing taxes on the import of coal. In Europe, the shift to natural gas has been evident. A FT report says the downturn started in Europe: “where falling industrial output in Germany, unseasonably warm weather and a glut of liquefied natural gas shipments from Asia hit natural gas prices and ultimately demand for coal”.

Analysts say lower coal prices would shrink US exports very quickly. Australian thermal coal prices have come down by 14 percent since Jan-19, while South African coal have plunged 24 percent since Jan-19 and 38 percent since Oct-18. Analysts have also revised down the futures price for coal associating it to “evaporating demand”. As reported by FT, BMO Capital Markets believe it to be a demand problem from the Europe side: “total volumes of coal burnt across the region fell to their lowest level in five years last month”, the report that published in April tells.

These changes in the coal markets do not seem to be short term jerkiness, and may be setting a new tone for the global commodity.