If you are a coal producer focused on the Chinese market, I am sure you will be scratching your head thinking about the future. Ever since China started imposing restrictions on imports, suppliers have gone on a wild hunt for buyers.
Chinese imports slumped in the seasonally strong fourth quarter last year after China asked its utilities to cut down on imports and urged its domestic producers to keep prices stable. Imports of bituminous, sub-bituminous and lignite fell 6% in 2014, the first decline seen since the 2008 global economic crisis.
So, international coal producers have navigated that rough weather last year. But has anything changed this year?
Yes, but it’s gone from bad to worse.
China’s coal imports, including lignite, thermal and metallurgical coal, hit a 43-month low of 16.78 million mt in January, falling 53.2% year on year – the seventh consecutive year-on-year decline and the biggest decline in the past 15 years.
February was no different, but it was expected because of the week-long Lunar New Year holidays.
The hopeful thought to themselves, “China will definitely come back into the market after the holidays.”
Well, little did they know the coal giant Shenhua had other plans. It began offering huge discounts to Chinese buyers who could perform on at least 50% of their contracted tonnages.
It’s not a small discount when you think that traders are struggling to make even a 25-cent margin on their trades. We are talking about a $4-6/mt discount in these past three months. That’s huge!
What this has done is pull down prices of imported coal prices. China, as many acknowledge, has the ability to push up prices when they are buying in full steam.
India is another major buyer and is importing tons and tons, but they will never push up prices. Indian power plants have their own limitations. They are not free to pass any rise in coal prices through to consumers.
As a result, several of them are still in the red. Yet they keep their power plants running by looking at cheaper options or only buying as much as required from the huge stockpiles at Indian ports.
Coal stocks at 16 major Indian ports were at 16.48 million mt as of March 20, according to Indian ship broker Interocean’s latest data.
At the end of March last year, coal stocks were a mere 7.7 million. So what has led to this big stock build up this time?
Blog post continues below…
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Huge vessel queues on the east coast of India and non-availability of railway rakes to evacuate the fuel from ports to the power plants are being blamed as the main culprits for the rising stockpiles.
Coal prices are soft and freight rates are much lower compared with last year. China is not buying big. As a result, most of the suppliers are now targeting Indian buyers, pampering them with a plethora of choices to pick and choose from. Several say when there is one enquiry from India, you get 10 offers.
And there is always that mindset one can possibly save those 25 cents to 50 cents with just a little wait longer.
So the spot market has been quite muted in terms of deals getting concluded. This most definitely has brought down the vessel congestion at several ports on the east coast, but railway rakes are still not available.
The waiting time for railway rakes ranges from 25 days to two months depending on the port.
As one trader said, “We can only earn 25 cents/mt maximum in such an oversupplied market. But given everything that is happening [or not happening] on the logistics side, is it worth the risk?”
So where do you go, as a supplier? Have a look at the Philippines. This market has the potential to add 13 million more to its existing intake, touching about 27 million in imports, but that will happen only by 2020.
Where else? South Korea? Yes, of course. But have you participated in a tender before? Do you have the power to supply at the low prices Korean utilities buy at? The Koreans have been buying quite a bit of 4,600 kcal/kg NAR coal but at close to $44/mt FOB.
Can everyone supply at this level? Several miners still wonder how is it possible to sell at such low prices. If you compare, Platts’ 4,700 kcal/kg NAR spot price assessment has been hovering around $47-48 FOB mark, and that, too, loaded on a geared vessel, which has its own loading and discharging equipment on-board.
Then there is Vietnam and Thailand, but are there are no volumes to play with.
Well, given this scenario, what would one expect? Some supply discipline, indeed. But is that happening? Indonesia, being the major exporter, is still predicting a year-on-year production increase to 460 million this year from last year’s 425 million.
It is also introducing a plethora of regulations to ensure everyone pays royalty for the coal they sell. The Indonesian government made it mandatory for exporters to have a license starting October 1, 2014, and this April they plan to make it mandatory for all exporters to do trades based on letters of credit.
This means no more cash deals and no more of those discounts. But this is still not expected to cause any significant stir in the market in terms of prices.
However, the silver lining is that Asian countries are expected to remain addicted to coal in the near to medium term, although there are indications that China’s coal consumption is expected to get lower in coming years as it tries to rely on cleaner fuel to run its power plants. There have been no such indications from India yet.
But what would make coal prices rise again? Basically, production remains the main issue. There has to be some supply control, and only then it can — at best — help maintain price stability, if not give it a major boost. Glencore has begun this process by announcing production cuts at some of its mines. Will the rest follow suit? Only time will tell.