RESEARCH and consultancy group Wood Mackenzie says coal suppliers looking to grow will continue to face creeping resistance, grappling with “an unfriendly permitting environment, and a climate-induced shift in capital”. However, it’s 2020 outlook for metallurgical and thermal coal identifies opportunities for growth and the emergence of some potentially game-changing technological developments.
“After a Jekyll and Hyde year in 2019, and a decade characterised by China’s disruption of the metallurgical coal trade, participants can be forgiven for being sick of change,” Wood Mackenzie said.
“But, we think a shift toward consistency and stability is probably too much to ask for in 2020 as China continues to play powerbroker over the seaborne market and spot pricing.”
Wood Mackenzie has identified seven key trends in the metallurgical coal trade and five in thermal coal, as follows:
Metallurgical coal
1. Global macroeconomic conditions to improve
There are early indications of stabilisation in the global economy with modest growth in developed countries expected in 2020. The caution is that developed country fiscal policy support will be modest, employment cycles are passing their peak, yet wage growth remains subdued.
2. Government stimulus to be a key demand driver
Buying patterns in China and India will remain the most critical driver of markets in 2020. We expect some positive trends to emerge, but there will be a strong reliance on government stimulus this year.
3. Chinese crude steel demand to peak in 2020
We expect crude steel production to eclipse 964 Mt, up 0.3% from 2019. Not since 2016 has China’s growth year-on-year been as low. 2020 will see the continuation of China’s steel industry’s mill de-capacity and capacity swap program in a move to improve the long-term health of the industry.
4. IMO 2020 sulphur limits to raise bulk shipping rates
With much global coverage and hype leading up to 1 January 2020, the bulk shipping trade enters a new era with the implementation of IMO 2020 – lower sulphur standards for fuel oils used in ships. IMO2020 will raise the costs of ocean-going freight as the marine sector uses these costlier fuels, which has wide reaching consequences across the global economy.
5. Supply growth to become more challenging
Like all miners, metallurgical coal producers face mounting pressure as the global lens continues to focus sharper on the industry. The spectre of new external threats highlighted by recent Australian bushfires, and growing water stress, will add to the challenges for those trying to bring new supply to market. Projects face heightened environmental, social and governance expectations from all facets of society including investors.
6. An end to bi-lateral quarterly contract negotiations
Nippon Steel decided to settle quarterly hard coking coal prices using spot index averages in 2017. Since then the tradition of bi-lateral price negotiations for quarterly contracts has been limited to PCI and semi-soft coking coal deals. But since 2017 two rival pricing mechanisms have emerged – existing side by side – and the tension created has reached breaking point.
7. The emergence of new long-term themes in 2020
In a first for the coal industry and a sign of the future, BHP Mitsubishi Alliance will introduce an autonomous haulage fleet at its Goonyella Riverside operation. The Queensland operation will see a total of 86 trucks commissioned over the next two years with the first set due in the first half of 2020.
ThyssenKrupp announced a series of industrial scale injection tests of hydrogen into one of its Duisburg No. 9 blast furnace tuyeres. Billed as a world first, the company injected hydrogen, replacing PCI coals, to make hot metal. While this is a baby step towards steel decarbonisation, metallurgical coal producers, especially of PCI, should pay attention to this pilot project.
Thermal coal
1. China’s domestic market will remain oversupplied
We anticipate that the continued ramp-up of new projects in 2020 will sustain the oversupply situation in China’s thermal coal market this year, outpacing demand growth. We estimate 156 Mt of new capacity was added in China in 2019, while the pipeline for projects under construction stands at over 600 Mtpa. However, we do not expect Chinese demand for thermal coal to grow as fast as supply.
2. Weaker Indian imports, as domestic supply recovers and demand growth slows
India faced sluggish economic growth in 2019, with Q3 GDP growth rate slumping to 4.5%, the slowest pace of expansion in six years. However, we expect the Indian economy will recover in 2020 with the government taking on a slew of measures from Q3 2019 to revive growth. Economic stimulus programs will help provide support to Indian coal markets but expected improvements in domestic coal supply will dampen hopes for significant import growth in 2020.
Wood Mackenzie expects thermal coal imports into India will decline slightly this year to 181 mt.
3. Low-cost LNG will continue to drag on coal demand in the Atlantic
Global LNG supply is set to grow at 7% in 2020, as freshly commissioned US projects push more LNG into an already saturated global market. Europe will again be called upon to save the day, however unlike 2019, European gas storage will start the year at record highs. The European TTF gas price will fall even lower in 2020 and continue to displace more coal. Global seaborne LNG prices should also fall.
4. Retiring coal-fired capacity in Europe will be offset by new units starting in APAC
China will dominate coal-fired capacity growth in Asia, with 30 GW of new capacity scheduled to come online in 2020 as renewables and other clean energy sources are still unable to meet the country’s growing electricity demand.
On the whole, global coal-fired capacity is expected to grow by net 28 GW in 2020.
5. Traditional Atlantic suppliers will battle to keep shipments flowing
The forecast 2020 ARA and Newcastle prices remain challenging for most Russian coal producers due to high transport costs. We estimate average rail and port costs for export thermal coal from Kuzbass and Khakassia to export ports at US$33/t and US$14/t respectively in 2019.
Port rates for coal handling are unregulated and are falling too. We estimate that average 2020 port costs will be US$1-2/t lower in the eastern ports and US$3-4/t lower in the western ports compared to 2019. In our year-average scenario, this could result in a US$7/t (US$3/t rail and US$4/t port) reduction in transport costs for some Kuzbass-Baltic port export coal shipments.
