Mon, October 30, 2017 10:41 am
Hans and Andy traveled to Barcelona, Catalonia (sorry – Spain) for the World Coal Leaders conference. The mood was mostly upbeat compared to last year, but some concern was expressed about Europe and China. Key takeaways follow.
Rodrigo Echeverri, Head of Energy Coal Analysis at Noble Resources said the outlook for Europe is not so good – a viewpoint subsequently reaffirmed by Trevor Sikorsky, Director at Energy Aspects. New regulations in the EU, notably BREF (Best Available Techniques Reference document) in the IED (Industrial Energy Directive) concerning NOx emissions will cause another round of coal unit closures, especially troubling for the lignite-fueled plants in Germany.
Rodrigo was more optimistic about global coal markets and noted that they will grow by approx. 37 mm MT (4%) this year to 928 mm MT. All the demand growth will occur in Asia with China expected to increase by 25 mm MT and Japan, Taiwan, Korea and Hong Kong collectively growing by 15 mm MT. According to Noble cost curves, the marginal cost for thermal (6,000 Kcal/Kg NAR) in 2016 was $85/tonne for 890 mm MT demand. When demand exceeds 900 mm MT, US tonnage is needed to meet market needs.
China was, as usual, a central topic. Rodrigo seems to support the idea that 2018 will see a continued growth in demand for imported coal, much like 2017. His take on inventories show China is close to a 3-year low and with a potential difficult winter and growing demand for air-conditioning during the summer, coal will do the heavy lifting. Additionally, Rodrigo was optimistic about the Chinese economy and said that as power demand grows 5% or more, coal will maintain or grow share in China. Peter Lindstrom from Torvald Klaveness pointed out that slowing investment in Chinese real estate, a leading economic indicator, is something to watch closely.
Guillaume Perret, Founder of Perret Associates said that China should support coal imports of roughly 200 mm MT per year through 2020 but he then threw some coal-water on the longer-term forecast by highlighting the uncertainties including $6.8 trillion in debt, the “ghost cities” which seem to be spreading with the advancement of the “One Belt-One Road” initiative and the overarching question of what happens when this infrastructure spending is done. Guillaume also likes coal demand in other Asian countries and highlighted 2017 YoY coal import growth in Japan (+3.5%), South Korea (+7.5%), Taiwan (+7.9%), Pakistan (+48%) the Philippines (+30.8%).
In terms of India, Rodrigo’s view is that the renewables targets will not be reached and that power sector growth will require import growth beyond 2018. Most interesting was in the concluding remarks where Rodrigo said that the global market is 20 mm MT short for 2017 and continues to be short in 2018. “I don’t know where to find the coal” was something the industry has not heard in years.
This global shortage was echoed by Howard Gatiss, CEO of CMC who noted that global coal producers are not putting in the capital to replace coal production and that investors will remain hesitant as long as coal is viewed in a disapproving light.
The news from the MENA (Middle East-North Africa) was generally positive with Waleed Abouraya, President and CEO of MEPC, stating that Egypt has more coal demand growth due to cement production and power generation. Dr. Sirri Uyanik, CEO of Iskenderun Enerji in Turkey suggested that eastern Europe will see growth in coal demand.
George Dethlefsen, CEO of Corsa Coal, pointed out that the 90th percentile of the cost curve is the best indicator of the price floor. The floor was breached in 2014 when new Australian production hit the market, but supply and demand are more balanced now. Equities are currently pricing at roughly $115/ton medium-term, which implies most new large met coal projects are unlikely to go forward. Several data points suggest the floor is at $140/MT and the Chinese breakeven price is at approx. $146/MT.