India’s growing appetite is becoming increasingly central to global thermal coal prices, which analysts predict, will harden moving towards the end of this calender year.
“In the short-term, there could be a bit of softness in the prices. But in the long-term, we remain very bullish on thermal coal. There is an extremely strong demand from India,” said Amrita Sen, an analyst with London-based Barclays Capital.
India, currently the world’s fastest growing coal importer, is expected to require about 375 million tonnes (mt) of coal every year by 2017, by when it hopes to add 75,000 Mw of thermal generation capacity.
Estimates, by KPMG, however, indicate that about half of this requirement will be met through domestic production. As a result, India will need to import between 150-180 mt annually.
“Our sources say India will continue to probe the market and try to pick up as much cheap tonnage as possible,” said Platts International Coal Managing Editor James O’Connell.
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Earlier this year, Union coal minister Sriprakash Jaiswal had said India would need to import at least 83 mt of coal during 2011-12, in order to meet the overall demand in the country.
Rest of Asia
Demand from China, the world’s largest importer of coal, is expected to grow, although it may remain sluggish in the short-term.
“While China has remained away from the market in recent months, it is expected to return as a buyer but perhaps not until the fourth quarter,” O’Connell said.
The country, which is also the world’s largest coal producer, was a net exporter of the fuel till 2009, when it imported 126 mt of coal, even as demand from the Europe and Japan stagnated due to the financial crisis.
“As domestic thermal coal prices in China go up, they might feel the need to import more,” UBS Singapore’s analyst Andreas Bokkenheuser said.
In June this year, International Energy Agency analysts’ had said that China could import up to 170 mt this year.
Other Asian importers such as South Korea and Taiwan are also exhibiting a pick-up in demand. Activity in Japan, a major thermal coal importer in the region, is also showing signs of improvement after being buffeted by the slowdown, Barclay’s Sen added.
Europe
After a severe winter last year that extended into spring, Europe may not require as much coal as it did last year, according to O’Connell, but any resurgence will put pressure on supply and support prices.
“Stockpiles are high at the moment as well and this could have a calming effect on prices. However, this should be tempered with the fact that should European traders return to the coal market for material, it will see prices climb,” he said.
Moreover, the gradual shift in South African coal supply away from the West, and towards markets such as India, will also have an impact if demand from European countries increase.
“European demand is not going away anywhere. In countries such as Germany, the requirement for coal remains,” Sen added.
In 2008, about 213 mt of coal was shipped into Europe, although the quantum declined the following year on the back of the slowdown and availability of cheap gas.
Infrastructure
The infrastructure that services the coal sector has been “hopelessly under-invested” in, Bokkenheuser felt, and the problem of insufficient infrastructure may play a substantial part in supporting robust thermal coal prices.
“Although they are trying to ramp up infrastructure (in coal producing countries), it takes time, especially after the recession when it was difficult to get finance for these projects,” Bokkenheuser added.
Australia and South Africa are undertaking overhauls of their coal sector infrastructure, while Indonesia is working on developing this where coal assets are being explored.
“It is now looking like Newcastle Port (in Australia) will struggle to meet its target for September. This may have an impact on prices more quickly than some people think especially if the Chinese have to look elsewhere, whether that would be Indonesia or Richards Bay (in South Africa). Infrastructure is one of the hottest topics in the coal industry with little or no spare capacity,” said O’Connell.
Prices
As a cumulative result of all these factors, Sen feels that South African Richards Bay prices will be very well supported above the $90-a-tonnes mark. But these could rise if the infrastructural bottlenecks worsen, along with another severe winter in Europe.
Bokkenheuser, on his part, said that Australia’s Newcastle prices could move beyond $100 a tonne towards the end of this year, and even move to about $110 a tonne next year.
Spot prices for South African thermal coal remained under $85 a tonne on September 24, while that of Australian coal were around $95 a tonne on the same date.