Year round comment on the global coal markets, its participants and future

Coal is at a turning point

Published April 2016 by Guillaume Perret, Founder and Director, Perret Associates


Guillaume Perret from Perret Associates is the Coaltrans guest blogger for the April 2016 edition

As Perret Associates has just released a new quarterly edition of their Long Term Price Forecast Coal And Freight 2016-30 they share a few of their findings with Coaltrans readers. 


The timing is critical as, after a 5 year bear trend, the international steam coal market could be at a turning point.  


The main positive development since the beginning of 2016 has been the sharp rebound in oil prices. As a result the coal market has now have left behind the toxic environment of falling oil prices and depreciating coal-linked currencies which prevailed during 2010-15. 


In fact, Perret Associates’ cost of production models indicate that, due to the strong appreciation of the Russian Rouble and the Colombian Peso in particular, most cost curves have started to increase since their January 2016 low.


This is having a bullish impact not only on spot physical contracts, but even more so on discounted deferred financial contracts. Indeed the backwardation, or discount of the Cal.17 API2 contract vs. the spot index has decreased from $6.25/t in January 2016 to just $1.75/t as at mid April. 


The erosion of the backwardation has been even more pronounced for the two FOB contracts. For the API4 (FOB Richards Bay) contract, the discount of the Cal.17 forward contract vs. spot has decreased from $13.15/t at its peak in February 2016 to $7.3/t mid April. The same discount for the gC FOB Newcastle contract has decreased from $12.9/t to $4.15/t over the same period.   


Perret Associates expect this trend to continue and the market to potentially even switch to contango in the coming months, whereby forward contracts will trade at a premium to the spot. 


Indeed the current rally might turn out to have been overdone, with a potential downwards correction, in particular for the spot indices. But the structural trend of the market could turn out to be more positive as a global rebalancing is taking place. This mind shift could support deferred paper contracts. 


At current price levels, Perret Associates anticipate a marginal surplus of 18m tonnes in steam coal seaborne trade in 2016. But the seaborne market could switch to a theoretical deficit of 8m tonnes in 2017, rising to 40m tonnes by 2020, due to the acceleration of coal production cuts worldwide, as well as the cancellation or postponement of new investments in greenfield mining projects.  


If production is to increase enough to plug this theoretical deficit, steam coal prices will have to rise. Perret Associates expects the production increase mainly to come from idle capacity. 


Interestingly, such a price recovery could occur despite an overall decline in coal imports, which we expect to remain capped at below 1bn tonnes until 2030.


We also expect Chinese steam coal imports to fall by 28.5m tonnes to 123.2m tonnes in 2016. However, on a cautionary note, Perret Associates thinks that at such levels Chinese imports have more upside than downside, due to supported domestic coal demand and further cuts in production.


Finally, we also expect Indian imports to fall by 17.6m tonnes to 144.3m tonnes. This decline will be partly offset by further growth in imports by Vietnam, the Philippines, Turkey and Egypt, to name just a few.   




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