Global Thermal Coal Prices Lose Steam Amid Chinese Imports Slump

Global Thermal Coal Prices Lose Steam Amid Chinese Imports Slump

By Shubham Rai with inputs from Abdul Sayeed Khan & Aditya Sinha

Global thermal coal prices have gone into a downward spiral from the dizzying peaks they had climbed around September last year. Export prices of thermal coal have slumped across the globe, with Australian coal recording the steepest drop. Over the past eight months, spot cargo prices of thermal coal exported from the Australian port of Newcastle have fallen by almost 25% from USD 115 a ton seen in September 2018.

The steep decline in international coal prices since the start of the year is predominantly caused as a result of the massive slowdown in Chinese imports due to uncertainty over government curbs on foreign supplies. China accounts for about 25% of Australia’s thermal coal exports from Newcastle Port and is its second-biggest consumer, following Japan which currently takes Australia’s top quality thermal coal.

 

Imported thermal coal prices April 17 to March 19
Imported thermal coal prices April 17 to March 19

China’s Unofficial Coal Ban

China had initially imposed limitations on coal imports in the middle of last year but in November, comprehensive bans were placed at all major coal import terminals for an indefinite period of time. Although there have been no reasons indicated by the government authorities, China’s unpredictable decision to limit imports was largely perceived as efforts to tackle oversupply conditions, besides favouring domestic suppliers.

As a matter of fact, Chinese miners were said to have produced so much coal for the past winter period that the country’s power stations had hefty stockpiles worth at least 30 days of consumption needs. Notably, China’s annual coal production touched a three-year high of 3.55 billion tonnes in 2018, registering a growth of 5.2%.

Australian Coal Exports Impacted

With Australia exporting nearly one-fourth of China’s imported coal requirements, the Chinese ban has precariously imperiled Australian coal mining behemoths – including the likes of BHP, Glencore and Peabody Energy amongst others.

While Chinese officials denied political motivations behind import restrictions, anonymous trading sources confirmed that China’s new curtailment of seaborne coal imports undeniably targets Australian exports more than other suppliers such as Indonesia and Russia.

Most China-based traders have already reduced purchases of Australian thermal and metallurgical coal, citing tighter quality checks extended from the usual 20-25 days period to as long as three months in some instances. It’s worth noting that the implementation of lengthy delays on custom clearance times for Australian coal shipments could be regarded as counter-measures adopted by China’s foreign ministry in retaliation to Australia’s government banning Chinese multinational telecom companies, Huawei Technologies and ZTE Corporation, from supplying equipment and systems for the country’s 5G network in August 2018.

As a consequence, Australian thermal coal spot prices for delivery to China have come under increasing pressure on weak demand for the commodity.

China Coal Output Hike To Hit Global Import Demand

China’s domestically produced coal supplies are anticipated to increase this year, with the country’s efficiency-enhancing advanced capacity additions at new coal mines in place. In addition, focuses on railway lines – serving the key coal-producing regions and major coal-handling coastal and river ports – are likely to improve domestic supply during peak demand periods.

As the world’s biggest coal consumer gets set to strengthen its domestic output, the country’s demand for imports would be inevitably subdued. In effect, near-term demand in the global seaborne coal market will follow the negative outlook of the Chinese market. Reportedly, the Chinese government will further cap coal imports this year, to support domestic producers.

Elsewhere in the Indonesian coal market, prices of low calorific thermal coal grades offered into Asian countries had also embarked on a downward journey in the past six months – especially because the continent’s top two coal importers, China and India, have started to reduce their reliance on seaborne supplies of the fuel.

India’s Coal Production Surpasses 700 MnT in FY19

For the first time in the history of India’s coal production, output of the commodity has surpassed the 700- million tonnes (MnT) mark. The total coal output reached 720.4 MnT in financial year 2018-19 (FY19), mostly on increased production by the State-owned miner, Coal India Ltd. This is 6.49% higher than 676.48 MnT recorded in financial year 2017-18 (FY18).

 India’s Coal Production (Company-wise)
FY14 FY15 FY16 FY17 FY18 FY19 (E)
CIL 462.53 494.23 536.51 554.13 567.37 606.9
SCCL 50.47 52.54 60.38 61.34 62.01 64.4
Others 52.77 62.41 42.34 42.4 47.1 58
Total 565.77 609.18 639.23 657.87 676.48 729.3

Source: CoalMint, quantity in million tonnes (MnT )

 

Financial year FY14 FY15 FY16 FY17 FY18 FY19
Growth in % NA 7.67% 4.93% 2.92% 2.83% 7.8%

 

 

Indian Coal Production (Company wise) From FY14 to FY19
Indian Coal Production (Company wise) From FY14 to FY19
Indian Coal Production (Company wise) Growth in percentage From FY14 to FY19
Indian Coal Production (Company wise) Growth in percentage From FY14 to FY19

CIL’s Production Jumps 6.97% in FY19

Coal India Ltd (CIL), which is the country’s largest domestic coal producer, accounting for over 80% of its total coal production, showed significant improvement in its performance in FY19 when compared to previous two financial years (FY17 and FY18).

For the first time, CIL breached the 600-MnT mark in coal production and off-take during the fiscal year ending March 31, 2019, clocking a growth of 7% and 4.8% respectively. In terms of coal output, the Maharatna coal mining giant had produced 606.9 MnT in FY19 while in FY18, it had produced 567.37 MnT .

Out of CIL’s total coal production in FY19, output of non-coking coal, which is mainly used in generating electricity, increased by 7.05% to 571.74 MnT from 534.09 MnT in FY18 while production of coking coal, which is mainly used in the manufacturing of steel, grew only 5.65% to 35.16 MnT in FY19 from 33.28 MnT in FY18.

CIL’s Grade-Wise Coal Production Of Last 5 Years
Grades FY15 FY16 FY17 FY18 FY19
Non-coking coal 443.67 484.93 499.49 534.09 571.74
Coking coal 50.57 53.83 54.65 33.28 35.16
Total 494.24 538.75 554.14 567.37 606.9

 

Production Growth in Percentage
Year FY15 FY16 FY17 FY18 FY19
Growth in % N/A 9.01% 2.86% 2.39% 6.97%

Source: CIL, quantity in MnT

CIL's Grade wise Coal production Last 5 years
CIL’s Grade wise Coal production Last 5 years
CIL production Growth in percentage
CIL production Growth in percentage

According to media reports, the coal ministry has set a production target of 655 MnT for CIL for the current fiscal year of 2019-20 (FY20) after the Maharatna company closed last fiscal with 607 MnT of production. The ministry had set a production and despatch target of 610 MnT for the company for FY19.

At the beginning of every financial year, based on the projected requirements from power plants and other user-segments such as steel and cement, the coal ministry signs an agreement with Coal India, which is called the memorandum of understand (MoU) target. This becomes the ministerial target for the company.

After getting the new production target, CIL officials, as per media reports, stated, “Considering the production jump it had registered last year, the ministry wants Coal India to sustain this growth momentum and the target this year is in line with the growth chart that the company has mapped to raise production.”

However, CIL is continuously failing to meet the production targets. In FY19, the miner missed the target just by 0.5 % while in FY18, it missed the target by 5.4% (target for FY18 was 600 MnT ), despite having attained the highest-ever production level in both years. It is to be noted that the company’s annual coal production growth rate significantly improved in FY19 when compared to FY18 and FY17.

CIL scaled a new peak in production in the month of March, 2019, producing 79.2 MnT –  the highest so far in a month since inception. In doing so, the PSU coal mining behemoth clocked the highest-ever production volume of 3.14 MnT in a single day as on March 25, 2019.

The upbeat production tempo of the world’s largest coal producer in recent years was evident in the fact that it leaped from the 500-MnT production level to 600 MnT in a mere three years, whereas it took the company seven years to migrate from 400 MnT to the 500-MnT level.

CIL's Subsidiary-Wise Coal Output
CIL’s Subsidiary-Wise Coal Output

In spite of the fact that CIL crossed the mark of 600 MnT for the first time in FY19, the company’s production of coking coal has not been satisfactory in line with the rising demand. Coking coal production by CIL rebounded after falling in FY18, to record 35.16 MnT in FY19. The output was 6% higher on the year from 33.28 MnT in FY18, but has been subdued in terms of its share in the total coal production basket.

India has very limited domestic reserves of coking coal and this is understood by the fact that only five of the eight coal producing subsidiaries of CIL contribute to the coking coal output. Moreover, among these, Bharat Coking Coal Limited (BCCL) and Central Coalfields Limited (CCL) account for almost 99% of the coking coal production.

A break-up of output in FY19 indicated that BCCL was the largest coking coal producer in FY19. The output from BCCL was 24.51 MnT in FY19, up 5% year-on-year (y-o-y) from 23.3 MnT in FY18. CCL’s coking coal production increased 6% y-o-y to 10.19 MnT in FY19. The remaining output came in from South Eastern Coalfields Limited (SECL), Western Coalfields Limited (WCL) and Eastern Coalfields Limited (ECL).

India's Grade wise coal Imports
India’s Grade wise coal Imports

In a major setback to the government’s objective of cutting down coal imports, India’s non-coking coal imports increased by 19.45% to 182.8 MnT in FY19. Although India is among the top three non-coking coal producers, the pace of growth has been insufficient to meet the end-user demand. Also, timely availability of logistics is another major problem which is persistent in the industry from a long time. Inadequate coal transportation infrastructure, especially non-availability of railway rakes, has been slowing down the supply.

Trade Dynamics of Coal Imports In FY19

Indonesia, South Africa and Australia are the three largest exporters of coal to India. In FY19, most of the country’s non-coking coal was sourced from Indonesia because of its relatively low cost compared with other internationally traded coal, while over 75% of the coking coal was imported from Australia. Interestingly, the specification of Indonesian non-coking coal is almost identical and closely matches with India’s domestic coal and as per reports many Indian companies own Indonesian mines.

Country-Wise Non-Coking Coal Imports
 Origin Country FY18 FY19 % Increase/Decrease
 Indonesia 95.77 113.85 18.88%
 South Africa 36.92 36.50 -1.14%
 USA 8.01 11.88 48.31%
 Australia 3.62 8.22 127.07%
 Mozambique 4.19 4.79 14.32%
 Others 4.40 7.44 69.09%
 Grand Total 152.92 182.68 19.46%

Source: SteelMint, quantity in MnT

Country-Wise Coking Coal Imports
 Origin Country FY18 FY19 % Increase/Decrease
 Australia 41.08 40.36 -1.75%
 USA 3.19 4.23 32.6%
 Canada 3.25 2.76 -15.08%
 Mozambique 2.20 2.26 2.73%
 Russia 1.82 1.55 -14.84%
 Others 1.56 2.21 41.67%
 Grand Total 53.10 53.37 0.51%

Source: SteelMint, quantity in MnT

Non-Cooking & Cooking coal imports
Non-Cooking & Cooking coal imports

Analyzing the data compiled by SteelMint research shows that India’s non-coking coal imports rose by 19.46% y-o-y to 182.68 MnT in FY19 (April 2018- March19) compared with 152.92 MnT in FY18.

As per analysts, domestic logistical bottlenecks because of shortage of trains and regulatory charges targeting pollution cuts have all fuelled the higher imports, which are also expected to stay firm in FY20.

Imports from Indonesia, which accounted for over 60% of India’s non-coking coal imports, increased 18.88% y-o-y to 113.85 MnT in FY19 from 95.77 MnT in FY18. Coal imports from South Africa fell by 1.14% to 36.50 MnT . Most importantly, India’s investments in new coal-fired electricity generation capacity will support increased coal usage and the burgeoning use of advanced coal-fired generation technologies will require high quality coal that is not available aplenty in the country.

Moreover, despite the stated target of almost doubling coal production to 1 billion tonnes by 2020, growth in domestic production is likely to be constrained by land acquisition bottlenecks, lengthy approval processes, inadequate transportation systems and poor productivity. As a result, relying on imports seems inevitable.

India mostly imports coking coal from Australia but in FY19, imports from Australia fell by 1.75% while imports from the USA increased by 32.6%. However, the country’s overall imports of coking coal did not register much change and grew only by 0.51%.

Major Factors Behind Rise in Coal Imports in FY19

  • CIL Failing to Meet Its Annual Output Target: Despite crossing the 600-MnT coal production mark in FY19, CIL had again missed its annual target by a whisker. Issues of land acquisition delay in granting environmental and forest clearances are some of the major obstacles which are to be addressed in order to improve the production volumes.
  • Continuous Fall in Coking Coal Share: CIL’s production of coking coal has not been satisfactory in line with the rising demand. Although coking coal production by CIL had rebounded after falling significantly in FY18, its share in the total output volume has remained subdued.

In fact, CIL’s coking coal has accounted for only 5.8% of the total coal volume in FY19, reducing to nearly half in the past five years. Besides, in order to augment domestic coal supplies to the power sector, CIL’s supply to the non-power sector had decreased, which had resulted in an appreciable growth in coking coal imports.

  • Rising Power Demand: India is maintaining its reliance on coal-fired power, which accounts for the majority of its electricity generation. The country has raised its annual generation by conventional sources (thermal, hydro, nuclear and power imported from Bhutan) target by 5% y-o-y to 1,330 billion units (BU) for FY20, of which coal-fired plants have been assigned with the task of producing 1,058.79 BU, accounting for almost 80% of the annual demand.
Source-wise Power Generation of India
Power Generation FY15 FY16 FY17 FY18 FY19 Target for FY20
Thermal 878.32 943.79 994.23 1037.06 1072.22 1142.13
Hydro 129.24 121.38 122.38 126.12 134.89 136.93
Renewable Energy Source 61.72 65.78 81.87 101.84 126.34 N/A
Nuclear 36.10 37.41 37.92 38.35 37.81 44.72
Total 1105.38 1168.36 1236.39 1303.37 1371.27 1323.78

Source: Power Ministry, quantity in billion units

Source wise Power Generation Of India
Source wise Power Generation Of India

In FY19, the government directed Coal India Ltd and its subsidiaries multiple times to prioritise coal supply to state power producers and state government-owned power houses under the pretext of building coal stocks at these plants. Such a government order directly impacts the private power producers, who were seen many times running out of feedstock used to produce electricity.

  • Slowest Capacity Addition in 5 Years: Indian conventional power sources (thermal, hydro and nuclear) have recorded their lowest capacity addition in the past five years during FY19. Altogether these sources have added an installed capacity of 5,922 MW in FY19, which was 38% lower on the year from 9,505 MW in FY18.

Notably, capacity addition in the thermal sector totalled 5,782 MW in FY19, down 34% y-o-y from 8,710 MW in FY18, which is likely to have an adverse effect on existing capacities. In case of sudden outage of a power plant, the remaining units will have to significantly increase their coal burning, ultimately resulting in a drastic fall in coal stock levels.

  • Uncertainty on Pet Coke Usage: In line with the uncertainty regarding pet coke usage and a temporarily imposed ban, Indian buyers had significantly reduced their purchasing of pet coke in FY19 and had, instead, turned towards non-coking coal from the USA as a substitute.
Pet Coke Imports
Year Imports
FY 2014 3.04
FY 2015 5.83
FY 2016 9.92
FY 2017 14.93
FY 2018 11.65
FY 2019 8.16

Source: CoalMint, qty in MnT

Pet Coke Imports
Pet Coke Imports
  • Poor Response to Coal Block Auctions: Coal block auctions conducted by the coal ministry have received a poor response in recent times. In fact, the previous four rounds of the auctions have been officially terminated due to lack of response among the bidders. Had these auctions been carried out successfully, the dependency on domestic coal supply from CIL would have been significantly reduced.
  • Lower Coal Allocation in E-Auctions: CIL’s coal supply under fuel supply agreements (FSAs) has been raised at the expense of the quantity which was allocated for e-auctions, in order to pull the power plants out of a critical condition. Consequently, coal users not having a supply contract with CIL had to resort to imports to meet their demand.
CIL Coal Supply Under FSAs and E-Auctions
FY15 FY16 FY17 FY18 FY19 (till Q3)
Total FSA 426 448 430 460 383.01
E-Auction Volume 47 66 94 106 51.74

Source: CIL, quantity in MnT

CIL Coal Supply under FSA and E-Auction
CIL Coal Supply under FSA and E-Auction

Major Coal Importers of India in FY19

SAIL Top Coking Coal Importer in FY19

According to the data maintained with SteelMint, Steel Authority of India Limited (SAIL), the State-owned steel-making company, is the largest coking coal importer from the last two years. In FY18, it imported around 13.54 MnT but in FY19 its imports increased slightly to 13.88 MnT . Tata Steel (with imports of 8.62 MnT ) and with JSW Steel (8.31 MnT ) are in the second and third spots on the list of India’s top coking coal importers. It is to be noted that both Tata Steel’s and JSW Steel’s imports of coking coal in FY19 were less than in FY18.

Adani Largest Importer of Steam Coal in FY19

Adani Enterprises was the biggest importer of non-coking coal in India in FY18 as well as in FY19. In fact, the company’s imports increased by 9.55% to 26.51 MnT in FY19 from 24.20 MnT in FY18.

Looking at the continuously growing number of imported non-coking coal, it is clear that India is relying more and more on the overseas variety. Also, a large chunk of total thermal coal imports is mopped up by captive power plants across numerous industries that are mostly dependent on imports of the fuel because CIL has been unsuccessful in quenching the demand of an energy-hungry nation.

Essar Steel Top Importer of Met Coke in FY19

India’s met coke imports increased by 8.22% to 4.87 MnT in FY19 from 4.5 MnT in FY18. Essar Steel is the main importer of met coke in India and in FY19 the company’s imports of the material increased by 37.15% to 1.25 MnT . Moreover, India largely buys met coke from China but, in FY19 India’s imports of Chinese met coke fell to 1.86 MnT from 2.04 MnT in FY18.