Tue, October 21, 2014 3:38 pm

Coaltrans Copenhagen Recap

DTC recently attended coal conference Coaltrans Copenhagen read more below

DTC was well represented at Coaltrans Copenhagen this week, and our ‘divide and conquer’ strategy allowed us to network with a wide array of industry participants, maximize a packed schedule of meetings, and attend a number of private dinners.  Key takeaways from the rather somber conference are below.  Don’t hesitate to contact us with any follow up questions.

coal market

  • Coking Coal/Searching for a Catalyst:  There was very little talk about coking coal at the conference (in fact, the only coking coal section on the agenda was cancelled due to a lack of participants!).  That being said, we had a number of conversations with coking coal participants, and all were searching for a catalyst that will push coking coal out of its current rut.
    • Australians Penetrating Atlantic Basin:  As China has stepped back from the seaborne coking coal markets; some Australian cargoes are being marketed to European mills at prices which match delivered Chinese levels.
    • Timing for a Recovery:  Views run the gambit, but we didn’t hear any optimism of a meaningful recovery before 2016.  Thermal coal demand growth will eventually absorb the oversupply, but coking coal demand growth is limited to India (starting from a low base), China (behavior is unpredictable, and currently trending lower), and upside from developed markets if economies rebound.  One astute trader thinks it will be 2017/2018 before a sustained recovery ($140 – 150/MT).
    • Market Eyes US Cuts:  It is clear the global coking coal market is intently focused on the U.S. coking coal supply response, so much so in fact that we received questions about whether the U.S. domestic settlements for 2015 will prompt another round of closures.  During the Q&A, Kevin Crutchfield (Alpha Natural Resources) acknowledged that cutbacks are expected to accelerate in the U.S. and overseas.

 

  • Global Thermal coal/Caution Ahead:  In the three days of the conference and a number of conversations with traders, buyers, and exporters from around the world, we did not hear a single argument as to why thermal coal prices should be higher.  The wind turbine 50 feet from the front door of the conference center should have been a sign!  The pessimistic outlooks ranged from the API 2 trading below $70/MT all year in 2015, to another $15/MT of downside risk to Newcastle thermal coal prices.  Despite the widespread pessimism, one seasoned global marketer said traders make the market seem worse than it is, as the lack of volatility and flattening of the curve makes it difficult for traders to make money.
    • Australian Cargoes in the Atlantic Basin:  There was much talk on the sidelines about two Australian cargoes of thermal coal that recently arrived in the Atlantic Basin.  The cargoes were said to be distressed and perhaps off spec (high ash), and participants think the trader who moved the shipments were sending a message to the U.S. and Colombia.
    • China out of Seaborne coal Market:  The mandate for Chinese utilities to halve their thermal coal imports over Sep – Dec is having a definite impact on the market.  One Australia based thermal coal exporter said his company hadn’t booked any cargoes to China in two months, after a fairly active 1H 2014.
    • China Import Tariff:  One Australian suggested China’s import tariffs on coal were recently announced to gain leverage in free trade negotiations with Australia.
    • Indonesia UpdatePT Bumi Resources CFO Andrew Beckham acknowledged the Oct 1st thermal coal export license mandate will result in lower thermal coal exports in October but questioned the government’s ability to enforce it.  Exporters without licenses may find a way to the seaborne coal market one way or another.  He acknowledged that the government is indeed capping producer output. Other insightful comments below:
      • China Slump:  Beckham doesn’t expect the recent slump in China’s thermal coal import demand to become the norm and stated that it’s just a phase as the new president transitions into his new role.
      • China Import Duty:  Australia is the victim of China’s recent import tariff regulation; though Beckham understands the Australians are appealing it now.  The price of Indonesian thermal coal will fare better than Australian thermal coal.
      • Australian High Grading:  there’s a lot of high grading taking place in Australia which will come back to bite producers in the next 6 – 9 months.
      • Indonesian Exports:  Indonesia’s thermal coal exports increased 183% from 2005 – 2013, however, this year’s thermal coal exports are on track for its first Year on Year decline.
      • Thermal Price Outlook:  Beckham forecasts thermal coal prices to rebound within the next 12 months, with help from 30 – 40 mm MT additional Indian thermal coal import demand as a result of the illegal coal block allocation, but concedes any hope for thermal coal prices soaring above $90/MT is unrealistic as Indonesian producers will ramp up quite quickly before that rate.
      • Ukrainian Coal Market UpdateD.TEK’s Head of Trading and Deputy Commercial Director, John Woodham updated the audience on the beleaguered Ukrainian thermal coal industry.
        • Output Impacted:  During Jan – Sep 2014, thermal coal production in Ukraine fell 14% Year on Year as the Ukraine/Russia war moved atop of many thermal coal assets in the Donbass region.  In Sep ’14 the region only had 61 mines operating versus 126 in Jun ’14.
        • Critical Stocks:  There’s much concern around this coming winter as stockpiles at power plants are near critical levels.  D.TEK will have to import much more thermal coal than normal and has already tested a cargo of Australian thermal coal in the event shipments from Russia get cut off.
        • Production Rationalization Needed:  Fabio Gabrieli/Mercuria Energy Trading shared his well-positioned view on the global thermal coal market, estimating approx 1/3rd of suppliers are cash negative.  He pointed to supply cuts from Australia and Indonesia as the only way to solve the current oversupply.  China’s decline in demand and Australia’s ramp-up in production will drive the Pacific Basin’s marginal supplier, South Africa, to redirect shipments to the Atlantic Basin, which may offset the decline in U.S. thermal coal exports.  We could see a record amount of South African shipments into the Atlantic Basin this quarter.
        • European Buying Shifts to Shorter Term:  In general, European buying activity is poised to shift to a heavier reliance on short-term/spot purchases, as demand (particularly in shoulder season) fluctuates greatly due to weather and renewables.
        • Crutchfield and Boyce Trumpet Coals Many Successes:  Kevin Crutchfield/Alpha Natural Resources and Greg Boyce/BTU gave powerful speeches championing the coal industry.  Crutchfield spoke about the ineffective policies in the EU and U.S., which has led to high electricity costs and no benefit of a reduction in carbon emissions.  Crutchfield stressed that these policies are ‘all pain and no gain’.  Boyce pointed to energy poverty as the number one crisis of our lifetime as 3.5 billion people lack proper energy access, of which 1.2 billion are children.  Low cost energy is the catalyst for growth and today’s supercritical power with advanced emission controls provide both inexpensive and clean energy.
        • China Coal Market Update:  CRU’s Alex Tonk discussed the geographic and infrastructure challenges in China.
          • Southeast China:  The South East coastal provinces consume 40% of China’s total power, but produce only 4% of China’s coal.
          • Transmission Lines:  Current transmission lines have displaced 80 mm MT of coal, while transmission under construction will displace 40 mm MT and planned new transmission will displace 125 mm MT by 2020.
          • Future of Thermal Coal in Europe:  On a panel of European market participants, the group’s consensus belief was that coal still has a strong future in Europe, but we’re on the cusp of its demise in the U.K.  The panelist agreed there’s two scenarios for coal going forward:
  1. Continued expansion of unabated coal in Europe or
  2. The Continent will finally begin to take steps forward to advance CCS technologies.