The Big Picture: Coal market

By Nick Ristic

The seaborne coal market continues to tighten, driven by trade disputes and energy shortages. We look at how its impact on the dry market has changed since we last covered this topic.

Prices continue to rise

Since we last focused on the volatile global coal market a couple of months ago, it has tightened further, fuelling more price increases and contributing to the ongoing rally in freight. In China, front-month coking coal futures hit as high as 2,268 RMB per tonne last week, marking a 47% increase since the start of the month and a 92% gain YoY. FOB prices are also on fire. Newcastle coking coal futures hit almost $135 per tonne yesterday, up by  nearly 150% YoY and their highest since 2010.

With the ban on Australian coal imports still in place, Chinese buyers have upped their purchases from other suppliers such as Indonesia, Russia and the Philippines. But even so, these volumes have not been enough to offset an apparent shortfall in domestic supply. As many as one hundred mines have reportedly been temporarily closed over safety issues ahead of the Chinese Communist Party’s centennial, while border restrictions have throttled the flow of Mongolian coal into the country. All of this comes during a key restocking period ahead of the summer months. Inventories of coal have remained low, and this, combined with expectations of lower rainfall and weaker hydro power generation this year, has added to fears of an even tighter market over the second half of the year.

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To ease some of this pressure, which has been weighing on China’s power utilities, planners have allowed more imports into the country, which have mostly come from Indonesia. 

Total coal imports in June reached an estimated 29.5m tonnes, a record monthly total and a 14% improvement on June 2020. Since the Australian ban, we’ve also seen a sharp increase in supply coming from Russia, in the form of both short trips from the country’s east coast, and longer-haul trips from the European continent via the Arctic route. The majority of China’s increased import volume has been hauled by Panamaxes. These ships discharged about 15.2m tonnes of coal in China last month, an increase of 111% versus June 2019, before the pandemic and trade disputes disrupted flows. Supramaxes have also seen a meaningful increase in trade, shipping 8.2m tonnes of coal to China last month, up by 15% on June 2019.

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 Trade shakeup insulates Cape demand

Capesize coal shipments into China, on the other hand, remained weak in June. Volumes increased by 42% MoM to 4.8m tonnes, but remained 32% lower than the pre-pandemic figure. This is likely a function of less cargo arriving from Australia, which typically ships on Capes, but as the trade dispute between Australia and China has shifted cargo flows, Capes have found themselves employed on longer voyages, which has in turn helped to tighten this market. As a result of more Russian and North American coal heading to China, and more Australian coal heading to India, average Capesize employment per tonne of coal moved has increased by 9% versus pre-pandemic levels. This means that although absolute coal trade on Capes has not recovered, Cape employment generated from coal trade has surpassed what it was in 2019.

Conversely, Supramaxes appear to have lost out from a reduction in Indonesia - India coal trade, which has been displaced by Australian exports. Supramax demand from coal trade over Q2 declined 12% YoY, however with trade on other routes being so strong, this effect has not been felt in the wider market.

 

Europe too...

China isn’t the only place where energy prices are affecting the dry market. In Europe, a worsening shortage of natural gas is beginning to make coal more price competitive, and raising rates of coal burn across several countries. Benchmark gas prices in the Netherlands (TTF) have surpassed $12 per MMBtu, the highest since early 2018 and six times higher YoY, as a harsh winter has depleted inventories. Lower supply in the US, which is grappling with energy shortages driven by the recent heatwave, and stockpiling in Asia are also adding upward pressure to gas prices globally.

According to Refinitiv’s calculations, which compare the costs of electricity generation from different fuels on a like-for-like basis, natural gas prices in Europe have crossed the average threshold where coal becomes a more attractive option. This is after accounting for efficiency rates of power plants and the carbon costs that they incur. Based on forward prices of these commodities, this situation is expected to be sustained through the remainder of this year.

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Europe’s coal imports have been trending down for several years now. Total seaborne receipts in 2020 stood at just 68.8 m tonnes, less than half of 2015’s total, and we had previously expected this pattern to continue this year. However these energy shortages appear to have driven a short-term rebound, which could continue if the aforementioned conditions persist.

Capesize trade into Europe fared particularly badly last year, dropping to just 1m tonnes in April, but since then these ships have led the recovery, surpassing 2.5m tonnes in May, the highest level since November 2019. Part of this has been facilitated by a recovery in Colombian exports, but discounted Australian coal shipments have also gained more of a foothold in the European market - another silver lining of the trade dispute. Australian Capesize coal shipments to Europe so far this year have totalled 6.4m tonnes, up by 42% YoY. It is also likely that the relatively expensive freight on Panamaxes has nudged shippers to up stem sizes, providing a boost to the Capes.

Longer term, we still see plenty of headwinds for coal demand in this region, which are likely to drive further declines in imports down the road. In the meantime, however, high energy prices may be enough to further fuel a temporary reversal in this trend