Global coal markets in distress

Coal customers should stock up—which includes coal-fired power generating companies here and abroad as well as cement manufacturers using coal as primary fuel. If their own demand sustains, they could be riding this prolonged wave of global coal prices hitting their lowest in several years. At least, it does bode well for cement industry margins that are hit by weak demand and weaker rupee.

The price slump for coal has been coming on for several months now. Just last June, they had reached a peak in three years; now they are trailing the lowest end of the tail. After a massive increase to $106 per ton in just a few months in Jul-18, South African coal prices have plummeted by 61 percent till Jul-19 while Australian thermal coal prices have fallen by 66 percent over the past year. Australian coal was selling at $120 per ton last summer and they are now trailing $70.

The prices have depressed so far and profits for coal miners have thinned so much that some coal miners are contemplating selling off some of their business units. Demand is the main offender. In fact, coal markets are flush with a supply glut for coal, sans demand for it. Global GDP forecasts have been cut predicting reduced consumptions. The biggest coal consumer, China’s demand has suffered significantly due to reduction in its power demand, and an ongoing trade war with the United States which is only picking up steam; instead of finding its way to some resolution (US President Donald Trump has just slapped a fresh set of tariffs on China).

Only a few months ago, China was also found rerouting Australian coking coal shipments (used for steel manufacturing) off its shores. The country had earlier announced its commitment to cleaning its housing and protecting its deteriorating environmental and vowed to cut down coal production and imports significantly. Other markets are also witnessing a coal demand slump on the back of an evolving fuel mix, leaning increasingly on renewable energy and cheaper natural gas. The same has happened in India where demand has dried up due to low-cost renewables and coal overcapacity in-house. According to reports, India’s installed coal capacity is 20 percent higher than the country’s peak demand.

Coal miners and investors into coal have to bite their tongue and bide their time. Any recovery will be predicated on how well and how smoothly the demand outlook in primary coal consuming markets change. According to the Financial Times, the big test of market sentiment will come in September as utility companies and producers in Japan and Australia sign supply contracts for high-quality thermal coal which are used as benchmark for deals in Asia.

Right now, coal importers in other countries can grasp this low-cost opportunity while they can.