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Argus Seaborne Thermal Coal Outlook
In Focus
Special Edition
January 2016
illuminating the marketsCoal
January 7 - Top 5 for 2015
Key factors to watch in the calendar year.
February 4 - What if
Scenario analysis covering the base and bear case for
prices.
March 6 - Indian Supply and Demand review
Import balance in context of domestic demand and supply.
April 7 - Glencore supply cutsSegmentation of thermal coal prices.
May 6 - European demand and supply risks
A country-by-country view of demand risks and potential
supply.
June 3 - Changing shape of swaps curves
Examining the dramatic shift to backwardation in swaps.
July 7 - A closer look at Chinese inventory data
Review of the most useful and timely data points.
August 5 - US Coal market review
State of US domestic and export supply.
September 2 - Revisiting Indian demand and supply
Updating our assumptions in light of weaker than
expected coal-burn.
October 5 - Prospects for Chinese exportsLooking at the prospect of a large-scale return of Chinese
seaborne supply.
November 6 - 5 year outlook for demand and supply
Review of the longer term outlook.
December 3 - Stock check
Review of visible inventory at key demand points.
In FocusIn each monthly publication of the Argus Seaborne Thermal Coal Outlook, we present a more in depth research piecebeyond the regular review and analysis of price forecasts, demand and supply.
The Seaborne Thermal Coal market continues to evolve, with each month bringing additional analytical challenges.
Regulatory changes, shifting domestic demand and supply balances, strategic moves by producers and large shifts in
swaps markets have all been factors that have affected the outlook for coal prices, which extends beyond the connes
of estimating and forecasting imports and exports of coal.
Below is a short summary of the topics tackled in 2015, with the highlighted reports attached to this document. For
any questions on this research or the Argus Seaborne Thermal Coal Outlook, please contact Hayden Atkins at
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May in focusBalancing the demand and supply risks in Europe
Risks to supply Atlantic markets have emerged in Colombia and Russia, as coal movement has been restricted. But this has come
following strong growth in Q1, with demand in several key markets appearing more vulnerable heading into summer.
The European demand and supply picture for imported
thermal coal is mixed, with new threats to both demand
and supply emerging in the last month. On balance, the
presence of high levels of inventory should mean that cif
ARA prices struggle against other benchmarks.
Cif ARA prices have recovered substantially from the low
point in early January, although are still 18pc below levels
seen at the end of November 2014. Some of this movementappears to be due to shifts in oil and FX markets, although
this inuence has waned.
The chart below shows rolling 20-day correlations between
cif ARA prices, Brent crude and the Euro, with a level of
1 indicating perfect positive correlation and -1 perfect
negative correlation.
After being highly correlated in December and January, the
FX and oil movements have not correlated with European coal
prices. Rather, fundamental demand and supply factors appear
to be playing a much more important role.
Demand risks Turkish hydro generation undermines coal burn
European coal demand trends are not uniform in 2015, with
some countries posting gains in consumption and imports,
while others decline.
Turkey is expected to post substantial increases in coal
imports. In particular, higher utilization of imported coal
red generation capacity that was brought online in mid-
2014 would lead to higher imports for 2015. Steam coal
400
500
600
700
800
900
400
500
600
700
800
900
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2015 2014
source: TEIAS, Argus
Turkey import-coal power generation GWh
Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15
-1.0
-0.5
0.0
0.5
1.0
-1.0
-0.5
0.0
0.5
1.0
cif ARA and Brent Crude cif ARA and Euro
Source: Argus
Price correlations
imports in the year to February are around 0.5mn t higher
than the same period in 2014.
For the start of the year, this was the case, with generation
from import-based coal plants rising by 27pc in the rst
quarter. But as the chart above shows, generation has
crashed in April to be ~1pc higher than last year.
This decline in coal-red generation has been a massivesurge in hydro generation since the start of the year. April
2015 was double the level seen in April 2014. Power demand
has also been slow, with total power generation rising 1.2pc
over the same period.
With sluggish industrial activity also affecting demand from
cement makers and other industrials, we have subsequently
reduced our import growth assumption from +5mn t to 3mn
t, with the risks to imports more balanced than previously
anticipated.
UK switch starts earlier
UK coal demand and imports were destined to decline in
2015. With inventories swelling in 2014 and a rise in the
UK Carbon support price on 1 April shifting generation
economics against coal.
Utilities have pushed for import deliveries prior to the
carbon price increase to avoid this additional cost in
Q1, but this interest is fading as the clean spark spreads
are now favoring gas generation over less-efcient coal
plants.
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High-frequency data from the National Grid shows that
this switch in generation economics has seen CCGT
generation take share from coal during off-peak hours,
with a 6-7pc swing in generation share compared to April
2014. With total demand down 3pc, this has pushed coal
generation down 20pc YoY, and CCGT up 30pc.
Some of this weakness in coal demand will fall on
domestic production, although this is marginally higher in
the rst two months of the year. We currently forecast UK
imports to fall 9mn t , although the risk is that the decline
is greater than this.
German import strength suggests inventory gainOne of the more perplexing developments in 2014 European
coal markets was the strength of German imports against
the decline in coal burn.
Generation at hard-coal red power plants dropped 10pc
in 2014 as mild summer weather and favorable conditions
for renewables eroded total power generation and the need
for hard coal power. In the year to date, coal burn has been
at according to data from Fraunhofer ISE, with a surge
in offshore wind generation on new capacity additions
impacting the generation mix.
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-20%
-15%
-10%
-5%
0%
5%
10%
15%
-10
-8
-6
-4
-2
0
2
4
6
8
Change in domestic sales (LHS)
Change in imports (LHS)
Growth in hard coal generation (RHS)
Source: VDKI, Argus
German imports, domestic sales and generation mn t, YoY
38 31
1723
0%
10%20%
30%
40%
50%
60%
70%
0%
10%20%
30%
40%
50%
60%
70%
Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15
CCGT Coal
Source: BM Reports, Argus
Off-peak coal and CCGT power generation share
Imports, on the other hand, have reported to be a little bit
higher in 2014, with seaborne exports accounting for the gains,
with railed coal from Poland and the Czech Republic fairly
stable. Sales from domestic mines were slight higher 7.6mn t.
So even though coal burn has so far proven to be on par
with the same period in 2014, there is an implied inventory
build that should lead to a decline in imports in 2015. While
the trajectory for coal-red generation for the rest of the
year is subject to the vagaries of the weather and renewables
availability, we are forecasting a decline of imports of ~6mn t.
Gains in coal consumption elsewhere
There are some regions were coal burn has been improving
and inventory has been declining. In Spain, stronger power
demand and a reduced requirement for domestic coal use has
seen an increase in import demand, with inventories starting
to fall. New coal red generation in the Netherlands should
further boost coal imports in the coming months, while coal
burn in France is rising from very low levels seen in 2014.
This will not be enough to offset the declines in coal-burn
seen elsewhere, with total European demand likely to fall
by 7-10mn t in 2015. But it is a reminder than the power
generation trends are not uniform across the region.
Emerging supply risks, but do they match the demand risks?
The recent stabilization in cif ARA prices has partly been
attributed to emerging supply issues in Colombia and Russia
in particular.
Supply trends into Europe shifted markedly over 2014. As
demand for imported coal in China capitulated and prices
fell, supply from Atlantic market producers that had made
its way into Pacic markets was now being pushed into
more traditional markets. This saw supply from South Africa
in particular expand by around 4.5mn t, even as demand
in the region fell. This had the effect of pushing US supply
out of Europe and the seaborne market all together, with
exports falling by a total of 15mn t in 2014.
The rst quarter of 2015 has seen competition for European
buyers intensify by an improvement in export availability from
Colombia, which was hampered by government enforced
outages this time last year as newer ports came online. While
exports from the US, South Africa and Russia to Europe have
dropped, supply from Colombia has risen by more than 4.5mn t.
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The strong performance from Colombia is now likely to
slow due to limited railing on the Fenoco railway. This is
controlled by Drummond, Glencore and Goldman Sachs and
services the Cesar coal producing region, which accounts for
~45mn t of Colombias coal production.
The ban on railing at night on one portion of the track
has remained in place despite the efforts of shippers and
other parts of government to improve noise issues with
trains and overturn the ban. This has impacted shipments
too much in Q1, although stocks at some ports are now
low and shipments are being affected. Inventory levels at
Drummonds operations have dropped to very lowlevels
~0.3mn t, although inventory levels at Puerto Nuevo, which isoperated by Glencore have not been under as much pressure.
It is still not clear how long the Fenoco rail ban will last,
with the latest efforts to install noise reducing barriers
around tracks in areas where restrictions apply likely to
take around three months. This should see the gains in
Colombian exports expected in 2015 to be pared back to
+5mn t, although the impact of this ban is unlikely to be as
damaging to supply as the disruptions in Q1 2014.
There have been some other areas of supply concern. Some
South African producers have endured strikes, while a
landslide has affected the ability of some Russian mines to
move coal by rail.
But in aggregate, these supply disruptions do not appear
to be large against the backdrop of weaker demand
and high levels of inventory. Stocks at UK power plants
Implications
If cif ARA prices were priced purely on the demand and
supply balance in Europe alone, then we think that prices
would be likely to fall in the coming months. However,
seaborne thermal coal markets are interconnected. To be
sure, the swing in demand and supply in China, India and
Indonesia does dwarf the movements seen in Europe
and arbitrage prices in China have become increasinglyimportant over the past few years.
As laid out earlier in this report, we expect Chinese arbitrage
prices to improve as consumption picks up as the current
rate of destocking continues. An increase in China prices and
imports should help support most price benchmarks.
But this is a contrarian view, with most market participants
not expecting China to lead a rise in coal prices in
seaborne markets. To be sure, in the last month, a seasonal
slowdown in coal burn coupled with high inventory
through the supply chain in China has seen arbitrage prices
fall 10pc in April.
Even with a rise in Chinese arbitrage prices, we believe
that the differential between cif ARA and fob Richards Bay
(commonly known as implied freight), is likely to remain in
negative territory as seen at the end of April.
02
4
6
8
10
12
14
16
Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15
UK France Finland Spain ARA Stocks
+26%YoY
-15%YoY
-24%YoY
+26%YoY
Source: DECC, Eurostat, Argus
-1%YoY
Selected European coal stocks mn t12.7 12.1
10.014.6
6.05.75.04.5
0
5
10
15
20
25
30
35
4045
0
5
10
15
20
25
30
35
4045
1Q13 1Q14 1Q15 est
USA South Africa Colombia Russia
Source: GTIS, Argus
Steam coal exports to Europe mn t are particularly high in the context of falling demand,
while inventory at ARA ports and Richards Bay is also
relatively low. So these disruptions are unlikely to tighten
the balance of demand and supply of thermal coal into
Europe.
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September in focusIndia S&D: pause in demand or structural change?
Demand for imports have waned in the last few months, with many pointing to the lift in production from Coal India as a struc-
tural change that has set imports on a downward trajectory. We think the weakness in power demand is equally as important
and something that can be reversed.
There has been a considerable shift in expectations for Indian
imports in the near and long-term in the past six months.
The previous expectation that Indian imports would grow
rapidly over the next few years has been challenged by the lift
in domestic coal production and the rise in inventory, which
has cooled the appetite for imports and weighed heavily on
prices out of Richards Bay in particular.
0
5
10
15
20
25
30
0
5
10
15
20
25
30
35
Jan 13 Jul 13 Jan 14 Jul 14 Dec 14 Jun 15
Import, left Domestic, left Days of use, right
Source: CEA, Argus
India plant stocks mn t, days
2009 2010 2011 2012 2013 2014 2015
-20%
-10%
0%
10%
20%
30%
-20%
-10%
0%
10%
20%
30%
Total Coal Nuclear and Hydro
Source: CEA, Argus
Power demand weakness 3mma
55%
58%
61%
64%
67%
70%
73%
55%
58%
61%
64%
67%
70%
73%
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
FY 15 FY 16 FY 14
Source: CEA, Argus
PLF coal and lignite plants %
The most widely followed measure of inventory is the
daily stock data at 100 plants from around India, which is
shown in the chart above. This has soared in terms of tons
and days of use compared to August last year, although
the stabilization in the level of inventory at around 30mn
t suggests days of use should fall back towards 20 days as
coal burn rises on seasonality in Q4.
The composition of this inventory data is more
representative of the state sector than the central and
private sector generation. Total coal generation covered by
the survey is 75pc of total capacity, with close to 100pc ofstate sector covered, while the central and private sector
generation is 80pc and 43pc, respectively.
This composition may mean that the oversupply of coal is
somewhat overstated by this data, as plants covered do
not include any large plants dedicated to imports, while
generation from the state sector has been considerably
weaker than elsewhere. Private sector thermal generation
has risen by 14.2pc in the year to date, while the state sector
has fallen 2pc
Weakness in power demand a heavy weight
The weakness in coal burn and broader electricity
generation is a surprise relative to expectations at start of
the year. Total power generation grew by 3.3pc in the year to
July, which is much slower than the 9.4pc growth recorded
in the same period last year.
Coal power has also been displaced by stronger nuclearand hydro generation. Hydro generation growth has been
relatively modest compared to some years, rising by around
7pc year-on-year in July and August. Nuclear generation
was strong earlier in the year but has slowed in the last few
months as well.
India has also added signicant coal red capacity over the
past 12 months, which means that plant load factors (PLFs)
are now low. Given few power plants have issues obtaining
coal, this speaks to the weakness in power demand, which
is a different problem that coal-generators have faced
compared to the last few years.
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Another indicator of this weakness is the low levels of
day-ahead merchant power prices. This only represents a
small proportion of power produced and consumed, but is
indicative of marginal demand for power.
The chart below shows prices and volumes for the day-
ahead market on the Indian Energy Exchange (IEX). In
August, prices averaged 2.73 Rs/KWh, which is down 40pc
from the 4.5Rs/KWh seen in August 2014.
0
1
2
3
0
2
4
6
8
10
12
2008 2009 2010 2011 2012 2013 2014 2015
Volume Twh, right C learing price Rs/ Kwh, left
Source: IEX, Ar us
IEX day ahead prices
2007 2008 2009 2010 2011 2012 2013 2014 2015
48
50
52
54
56
58
-5%
0%
5%
10%
15%
20%Cement product ion 3mma, left PMI, right
Source: HSBC, MOSPI, Argus
Industry demand cement mn t
2
3
4
5
6
7
8
2
3
4
5
6
7
8
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
FY14-15 FY13-14 FY15-16
Source: CIL, Argus
Production, captive coal blocks mn t
30
40
50
60
70
30
40
50
60
70
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
FY14-15 FY13-14 FY12-13 FY15-16
Source: CIL, Argus
India pithead stocks mn t
Like power, demand for coal from industry has also been
relatively slow. Sponge iron and cement production have
been growing, albeit at fairly subdued rates as industrial
activity has generally been slower than expected.
Domestic supply lift, although tests ahead for logistics.
AS demand growth has slowed considerably, domestic
production and delivery of coal has improved following
years of stagnation. This growth has been below target, but
the 8.2pc growth in Coal India (CIL) production in the year-
to-date is much fast than the 2.5pc growth experienced in
the past few years.
One area that gathered a lot of attention at the start of
the year and has lost production momentum is captive
coal blocks output. While this is only a small portion
of production, it has declined almost 18pc in the year
so far and is one area touted for strong growth in the
years ahead. This highlights that despite the impressive
gains made by CIL there are still challenges ahead on the
production front.
Delivery of coal has also grown in the last year, although this
has been at a slower pace than production. Total dispatch
of coal is estimated to have growth at 5pc in the rst half of
2015, with CIL performing a little better, rising 6pc.
The slower growth in dispatch has meant that the trend of
falling pithead stocks has reversed since the start of the year
by 7.5mn t or around 4 days of supply. This perhaps speaks
to some of the logistical challenges in domestic production
displacing imported supply. Consumers that have coal
linkages are likely to take domestic coal over imports given
the relative cost, so the rise in pithead inventory is unlikely to
be a function of the slower growth in downstream demand.
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Start of a structural trend?
We last published our demand and supply forecasts for
India in March, with the expectation that inventory would
be largely neutral as demand growth absorbed growth in
domestic and imported supply.
The biggest miss in terms of our forecasts was the rate of
growth in demand, which we expected to be closer to 6.4pc
in the current nancial year. Our expectations for supply have
broadly reected the current trends, with the difference the
change increase in inventory over the past 6 months.
We were already forecasting lower growth in imports,
particularly as import-dedicated coal plants reach peak.
Power generation from these plants has been roughly at in
the year to date.
5
5.5
6
6.5
7
7.5
8
5
5.5
6
6.5
7
7.5
8
De c Jan Feb Mar Apr May Jun Jul Aug Sep O ct Nov
2014 2015 2013
Source: CEA, Argus
flat YTD
Import-based coal plant generation TWh
45
50
55
60
65
3
4
5
6
7
8
9
10
11
12
2012 2013 2014 2015
CPI, left RBI rate, left Indian Rs/US$, right
Source: RBI, MOSPI, Ar us
India ination, FX and interest rates pc, Rupees
If the recent performance of coal-burn versus supply was to
be the new trend, then the outlook for imported coal demand
would be poor. But we think that recent weakness in coal-red
generation is unlikely to be sustained in the medium term.
While it appears the Modi government has had some
success in boosting domestic coal supply, a much more
pressing issue now is slow growth in power consumption.
Part of this is likely to be macroeconomic, with the euphoria
brought by the new government last year now fading away.
But there is still plenty of policy repower that can be used
to boost the economy, with interest rates still relatively high
and ination low, while the budget balance has improved.
Below are our expectations of demand, supply and imports
over the next two nancial years (March year-end). While we
expect import growth to slow from the heady rates seen in
the last year or so, we think imports are unlikely to fall on a
full-year basis. The key variable in our perspective is not the
growth in domestic supply, but coal-burn regaining some of
its lost momentum.
India coal demand and supply
2013-14 2014-15 2015-16 2016-17
Supply
Domestic supply 565 612 650 692
Imports 163 216 231 243
Thermal 128 170 183 192
Met coal 36 46 48 51
Total supply 728 828 881 935
Demand
Power plants 572 646 683 739
Import coal only 37 41 43 44
Domestic coal linkage 535 605 640 695
Other 162 182 182 190
Total demand 734 827 865 929
Reported change in stock -6 0 16 6
Source: Ministry of Coal, Argus
Implications
The dynamics of the seaborne market have shifted
dramatically given the fall in Chinese imports and the
subsequent cuts in exports in some parts of the world.
Steady growth in Indian exports is supportive of a tighter
market balance in the absence of supply growth and stable
Chinese imports/arbitrage prices.
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October in focusChinese coal exports: next threat to seaborne markets?
The drop in Chinese coal consumption and the prospect of a depreciating Chinese yuan has increased the expectation of Chi-
nese exports returning to seaborne markets in the next few years. While we would expect Chinese exports to rise, understanding
the impact on prices is dependent on how China is incorporated in modelling the seaborne market and the fragmented nature
of key markets.
In some respects, the lack of Chinese thermal coal exports in
2015 has been a surprise, with 0.8mn t exported in the year
to August. This speaks to the competitiveness of Chinese
exports at current prices.
Chinas largest state-controlled producer Shenhua has
commented recently that they are aiming to reverse this
slide and expand their footprint in the Japanese market. But
many forecasters are wondering whether something more
structural is possible, with China potentially returning to a
net exporter of coal.
Chinas transition from net exporter to a huge thermal coal
importer was rapid. As the char t below shows, while net
thermal coal trade was shifting toward balance from 2004
to 2008, the tipping point for the explosion in imports
was the global nancial crisis in 2009. This period saw coal
demand and prices crash much more aggressively in globalmarkets than in China, with Chinese utilities using this
opportunity to buy cheaper imports on a large scale.
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
Jan 05 Jan 07 Jan 09 Jan 11 Jan 13 Jan 15
AUD USD
Source: FRED
Chinese yuan Yn
-10
-5
0
5
10
15
20
25
30
35
2004 2006 2008 2010 2012 2014
-10
-5
0
5
10
15
20
25
30
35Exports Imports Net exports
Source: China Customs
Chinese thermal coal trade mn t
0
1020
30
40
50
60
70
80
0
1020
30
40
50
60
70
80
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD
2015
Other Taiwan Korea Japan
Chinese coal exports mn t
Chinese seaborne supply was largely to the well-established
North Asia-Pacic markets of Japan, Korea and Taiwan.
Tonnages exported to these countries began to decline well
before 2009.
Policy shift
The shift to a net importer of coal was, up until recently,
supported by government policy through changes in
relative taxation of imports and exports. This, however, all
changed at the end of 2014 as taxes and quality regulations
were place on imports and export taxes were lowered.
Perhaps more important than taxation changes was the
appreciated Chinese yuan against the dollar. For the last 10
years, this signicantly shifted the competitiveness of the
domestic coal sector versus imports.
The recent small depreciation of the yuan has raised
the prospect that some of this competitiveness versus
international markets may be restored over the next few
years. But it is important to recognize that while the yuan
may have weakened against the dollar, it is still incredibly
strong against other producer currencies like the Australian
dollar and the Indonesian rupee.
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Interaction between Chinese and seaborne prices
The arbitrage between seaborne and Chinese marketshas been a focus of analysts and traders ever since 2009,
although the nature of this has changed as coal qualities
have become more fragmented. The ability and willingness
of Chinese buyers to blend various coals of different ash and
energy levels has opened up markets for different products
that were not signicant in the prior years.
There are two important points to recognize on the
interplay between Chinese and seaborne prices. First is that
a big change in net trade ows is not necessary for Chinese
prices to inuence seaborne markets and vice versa. Chinas
trade position did not change from 2006 to 2008, but the
tightness in the domestic market certainly contributed to
the spike in Newcastle prices, with Chinese supply not able
to ll the supply gap left by supply disruptions in Australia.
0
20
4060
80
100
120
140
160
180
200
0
20
4060
80
100
120
140
160
180
200
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
fob QHD 5500 kcal fob Newcastle 6000 kcalfob Indonesia 5500 kcal Newcastle 5500 kcal
Source: Argus
Coal prices $/t
Second is that while China has introduced a raft of policies
to support domestic producers a limit imports, there is
not sufcient evidence to suggest that these efforts have
radically altered interplay between Chinese and seaborne
prices. Regulators may take more action, but it is not clear
that this will be effective in driving a wedge between
Chinese and seaborne prices.
Understanding impact of Chinese exports
The impact of Chinese exports on seaborne markets is
straightforward if this is treated as an exogenous shock to
the seaborne market. An increase in supply in seaborne
markets will weigh on prices, all other things equal.
But the interplay between Chinese and seaborne markets is
much more nuanced than this, and this greatly complicated
how to incorporate Chinese supply and demand into the
seaborne market balance.
We attempt to do this by incorporating coastal China aspart of the seaborne market. This has the advantage of
reasonably good supply visibility by ships from Bohai Sea
ports and also benets from having some visibility on
inventory levels at ports and relevant power plants.
The drawback is that while coastal demand and supply
trends inuence the Bohai Sea price, it is not the only factor,
with demand in other regions and mine supply/inventory
trends also particularly important.
Under this framework, it is conceivable that Chinese exports
could have no impact on the market balance or prices.
Assuming the Chinese and seaborne markets are both in
balance at a given price point and China was to increase
exports by 5mn t , it would depress seaborne market prices,
but it would also reduce coastal China supply, supporting
domestic prices. The result would be that seaborne prices
would be signicantly lower than Chinese prices, which
would ultimately encourage imports to balance the
seaborne market.
While this a highly stylized example, it does highlight the
importance of considering the impact on Chinese coastalsupply and arbitrages when considering the the impact of
Chinese exports.
Exporting excess capacity?
In the example above, it was assumed that Chinese exports
would reduce domestic supply (in a balanced market).
But what if China was exporting excess capacity in an
oversupplied market instead?
Given the declines in Chinese consumption in 2015, it would
appear that there is ample spare capacity for exports atports. Chinese coastal shipments are likely to have fallen by
around 6.2pc in 2015, or about 40mn t. This is around the
level that China exported back in 2006/2007.
So Chinese producers could export signicant quantities
without affecting the domestic market balance, and this
may be desirable to help reduce costs. And while marginal
Chinese producers are not competitive at current prices,
there are low cost producers that could be competitive in
seaborne markets at current prices.
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But would large Chinese exports only affect seaborne
market prices? We would argue that this would in Chinesecoastal markets as well. This is because competition
from imports into Chinese markets would intensify given
displaced supply from other countries.
0
20
40
60
80
100
120
140
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
China Other Russia Indonesia Australia
Source: GTIS, Argus
Japan coal imports by source mn t
-5%
0%
5%
10%
15%
20%
25%
Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15
-5%
0%
5%
10%
15%
20%
25%
fob Indonesia 5,500 fob Indones ia 4,600 fob Newcastle 5,500
Energy-adjust price discounts
In this scenario, Chinese policymakers might intensify
their regulatory measures to restrict imports in order
create a bigger wedge between Chinese domestic and
international prices, but its unclear how effective that
will be
So for some low cost producers, it may make economic
sense to push into seaborne markets. But it is questionablewhether large scale exports are compatible with
policymakers aims of improving domestic market
oversupply.
Focusing on market segments
The analysis above focusses on demand, supply and price of coal
as it relates to the arbitrage into China. But coal markets have
become increasingly fragmented. While prices tend to move
together in a broad sense, there are pockets within the seaborne
market where Chinese exports may make sense without
disrupting Chinese arbitrage markets.
In particular the NEWC-spec market for coal has priced at an
increasing premium to other price benchmarks that are morereliant on Chinese demand. As the chart below shows, the
premium for Newcastle 6,000 coal over higher-ash Newcastle
5,500 coal, even though absolute prices have weakened.
The widening premium in this market appears to be a
function of limited supply growth in this market segment
and steady demand for this coal from Japan. This recent
settlement of the October annual contract by Japanese
utilities of $64/t, which is well over spot markets, is a
testament to this.
Australian supply has largely been responsible for llingthe void left by the withdrawal of Chinese supply, leaving
Japanese consumers increasingly exposed to a smaller
number of producers of specic brands of coal.
Returning to this segment of the coal markets would see
premiums for Newcastle 6,000 coal shrink rather than
undermine prices. But the magnitude of exports that would
be absorbed to achieve this is small. It is likely that this
process will take some time given the difculty of obtaining
a foothold in the Japanese market.
Implications
Given the experience of the year-to-date, we think it is
more likely that Chinese domestic supply is cut rather than
push into seaborne markets. Policymakers may try to boost
the relative competitiveness of exports through further
regulatory measure, although its not clear how effective this
will be
That said, Chinese producers are looking to get a foothold
into some segments that offer higher premiums, which
should see Chinese exports rise from very low levels at
present.
306
652
61
200
300
400
500
600
700
200
300
400
500
600
700
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Thermal coal exports Domestic shipments
Source: CCTD, Argus
-6.2pc
Chinese coastal shipments mn t
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November in focusFive-year outlook
Chinese thermal coal demand has undergone a structural shift in the last few years, and this has dramatically affected seaborne
prices. While the expected supply reaction has happened at much lower prices than previously envisaged, supply is now being
rationalized. This sets the stage for the next ve years, with changes in demand and supply to be much more marginal than the
last seven years, although this can still create meaningful price volatility.
The decline in seaborne coal demand and prices in the past
two years has seen many assumptions about the longer
term outlook abandoned. This is partially a reaction to the
more recent path in prices, just like the upward revision to
long term prices during the boom in the proceeding seven
years. But there has also been unexpected structural change
in key aspects of the demand and supply balance.
While some changes are likely to be permanent, it is perhaps
too early to abandon other assumptions. There are also a
myriad of cyclical and temporary issues that are likely to be
affecting current spot prices. This means that spot prices
today may not be the best anchor for basing longer term
assumptions, as the experience of the last few years has shown.
China supply adjusting to structural shift in demand
It is clear that the Chinese economy has moved to a lower
growth path than previously envisaged just a few yearsago. This is more than the law of large numbers limiting
growth. It is clear that policymakers approach to managing
the economy has changed, with ination no longer the
limiting factor to supporting growth. Financial stability,
corruption and the environment have also become much
more important competing concerns, and this has had a large
impact on the outlook for the economy and specic sectors.
The push for alternative generation sources to coal has been
one factor driving the weakness in coal burn in 2015. This is
set to continue over the next ve years, although there are
some factors that may slow the high rates of growth seen in
the last few years.
First, the pipeline of new hydro generation projects hasdwindled as permitting has become much more onerous.
Hydrological conditions are a year-to-year proposition, but
if average rates of utilization are achieved then we should
see a slowdown in the rate of growth.
0
500
1,000
1,500
2,000
2,500
2012 2013 2014 2015E 2016F 2017F 2018F 2019F 2020F
Solar Wind Nuclear Hydro
Source: NDRC, Argus
CAGR: 8.2pc
Chinese power generation by type TWh
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
-2
0
2
4
6
8
10
12
14
16
-2
0
2
4
6
8
10
12
14
16 Inflation GDP
Oct 2011 forecast
Oct 2013 forecast
Oct 2015 forecast
Source: IMF, Argus
China GDP and infation % change
Nuclear generation growth should continue to be strong if
the current pipeline of projects remains on track. There is
more uncertainty about wind and solar generation, as the
efciency of existing units has been low, even if the capacity
build out has been incredibly rapid. Overall, we forecast
non-thermal generation to grow by 8.2pc over the next ve
years, which will be faster than power demand growth.
The trajectory for coal consumption from the power sector
will hinge on how much power demand is not met by
alternative sources. We think that power demand growth is
now on a lower growth path, although it still seems likely to
grow faster than rates observed in 2015.
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As the chart below shows, power demand is currently weak
by virtue of low consumption from the industrial sector,which has been contracting all year. Services and household
consumption has risen at around 6pc.
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
0
20
40
60
80
100
120
140
160
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Coal production, left fob QHD 5,500, right cfr South China 5,500, right
Source: CCTD, Argus
Chinese coal production and prices Yn, %
2007 2009 2011 2013 2015 2017 2019
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
0.3
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%Total Industrial
Source: CEC, ArgusSource: CEC, Argus
Total generation
forecast range
Chinese power consumption by sector 3mma
While energy demand from heavy industry is likely to
remain weak, we are projecting that it will be closer to at
rather than continuing recent declines. Even a modest
improvement in industrial activity would see power demand
growth lift given 40pc of the total is growing at reasonably
strong rates.
Other areas of consumption of coal like cement, fertilizer
and chemical production and heating are projected tobe relatively stable. Under these assumptions total coal
consumption would grow over the forecast horizon,
although this growth is fairly marginal 1-2pc growth. This is
within the limits of environmental goals that policymakers
are looking to achieve.
But while demand growth in the next ve years is tepid
compared to previous expectations, there are increasing
signs that current prices are too low to support even a
small amount of growth. Coal production statistics in China
are fairly ropey, but partial indicators like rail and coastalshipments have fallen sharply in the year-to-date. Total
inventory has also come down even though demand is
contracting.
There is a concern that Chinese producers could increase
supply to meet higher demand without higher prices given
excess capacity and the desire to improve productivity and
reduce costs. While low-cost producers like Shenhua are
likely to have the capacity to ramp up output fairly quickly,
it is not clear that more marginal producers would do the
same without a signal from prices.
Given that inventory is not particularly high from a days
of use perspective and that supply cuts began at prices
that were much higher than current prices, we think that
prices are likely to move higher from current levels before
production can or will respond.
These developments will drive Chinese domestic prices,
which should drive arbitrage prices into seaborne markets.
But what about the import demand? We continue to
believe that Chinese imports are best understood as
supply in the seaborne market that has not found a home
elsewhere. Chinese demand is much more price elastic
than other countries. New regulations and taxes have
made competing with domestic coal more difcult and
have led to some supply cuts in the seaborne market as
a result. But there is not a huge amount of evidence that
the efforts of policymakers have led to a paradigm shift inthe relationship between Chinese domestic and seaborne
market prices, which is only marginally driven by the level
of Chinese imports.
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India supply strong, demand weakness temporary
Expectations for the longer-term outlook for Indian coal
imports has also shifted dramatically in the last year or so as
imports have dropped year-on-year in the last few months.
This change in view largely hinges on the recent and
forecast domestic production growth from Coal India, SCCL
and captive coal blocks.
We are forecasting for the improved rate of growth to
continue for the next few years, although we have more
conservative rates of growth toward 2020. In particular,
Coal India is planning for production to leap by 120mn t in
2017-18 in order to reach their goal of 1bn t by 2020. While
Coal India has proven it can grow at a quicker rate than thelast ve years, it is not readily apparent that such a leap is
likely.
The path of production from captive blocks is more
uncertain. After strong growth in the previous nancial
year, output has fallen and is weighing on total production
growth. Regulations hold the key to unlocking production
from these sources, although given the years of
underutilization, it is far from a forgone conclusion.
Demand has had an equally important part to play in
tipping imports into negative territory in the last few
months. Both coal-red and total generation growth was
underwhelming in the rst six months on the year, growing
at just 3-4pc/yr. This is well below potential for coal burn,
with utilization at coal plants dropping lower.
Will demand growth be weak in the longer run? There are
signs of a substantial turnaround in just the last few months,
with power generation rising and coal-burn rising to 10pc
growth rates as hydro generation has weakened.
Generation capacity is unlikely to be a limiting factor to
longer term growth, with the planned increase in the coal
generation eet still large even with a renewed emphasis
on renewables generation. While India has always had
ambitious targets to increase power generation, the success
rate of delivering new capacity has improved.
Power demand growth has a lot of potential given Indias
economic potential, but a limiting factor has been the poor
nancial state of state-owned companies distributing power.
Efforts have been made to improve this situation, with
recurring losses to be reduced via rising power tariffs and
a reduction in transmission and distribution losses, while
existing debts are being restructured with the assistance of
state governments and the Reserve Bank of India.
We are assuming that generation from coal plants that
are not built specically to use imported coal will grow
at a CAGR of 8.5pc over the next ve years. This is a little
faster than the previous ve years, although this was
supplemented by the ramp-up of operations at coastal
plants that now consume around 45mn t of coal.
With cement demand also forecast to grow at around 7pc,
we are estimating that thermal coal imports will grow even
with domestic supply growth lifting to an average of 7.2pc
over the next ve years. This should drive modest import
growth.
Developing markets ramp up in demand on track
While there is a widening range of views on the future of
Chinese and Indian imports demand, there seems to be a
consensus on the ramp-up in thermal coal demand and
imports from developing countries in ASEAN and other
countries like Turkey, Morocco and Egypt.
0
50
100
150
200
250
300
1997 2002 2007 2012 2017 2022
Source: CEA, Ar us
Coal-fred generation capacity GWh
401.2 415.9 431.3435.8 452.2 462.4
494.0530.044.5
50.451.3 52.2 53.2 50.5
50.5
55.0
44.049.3
50.4 51.351.0 52.9
67.053.0
300
350
400
450
500
550
600
650
700
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Captive coal blocks SCCL CIL
Source: MOC, Argus
India coal production mn t
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Plans for new red power generation are driving these
gains, with new capacity added in Malaysia, Turkey and
Morocco in the last 12 months examples of achievement
of bringing new plants online. The recent increase in
Vietnamese imports appears to be more about taking
advantage of the lower cost of imports than the realization
of new capacity.
Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15
-10
0
10
20
30
40
50
-10
0
10
20
30
40
50With carbon support price Without carbon support price
Source: Argus
Coal more profitable
Gas more profitable
UK coal vs. gas spark spread /MWh
0
20
40
60
80
100
120
2009 2011 2013 2015 2017 2019
Thailand Philippines Vietnam Malaysia
Source: Argus
ASEAN import projections $/t
We are projecting ASEAN coal imports to rise by 38mn
t over the next ve years. While this is nothing like the
explosive growth seen in China in the ve years prior to
this year, it will still be critical in shaping the outlook given
current prices are causing a contraction in supply.
Growth in countries like Egypt and the UAE is likely to also
be a small positive over the forecast horizon, although more
meaningful increases to co-red capacity are expected to
occur beyond 2020.
Developed markets how big are carbon policy risks?
Coal-related policy has shifted in some key north Asia-Pa-
cic importing countries. Korea is still set to import substan-
tially more coal in the next ve years as new plants come
online. But there is increased debate about the role of coal
in the power generation mix in Japan and Taiwan in the con-
text of longer term commitments to reduce carbon emis-
sions. While this has not changed our projections for fairly
at demand in these countries, it will require monitoring.
The situation in Europe is vastly different, where the
policy push to reduce carbon emissions has been going
on for some time. UK coal imports in particular are falling
sharply as a result of carbon policy, with the hike in the
Carbon Support Price this year ensuring that natural gas
is displacing coal in the generation mix. More coal-red
generation is likely to close, with some of it surviving by
complying with IED regulations and receiving capacity
payments. But utilization of these plants is uncertain,
particular in light of the recent drop in global natural gas
prices.
The path to reducing coal burn on continental Europe has
been more difcult given the economics to switch to natural
gas has not been nearly as compelling. The loss of nuclear
power generation in Germany has also made displacing coal
more difcult, while coal burn in Spain and Portugal has
grown substantially this year has hydro generation has been
weak.
Capacity is being closed across the continent as severalplants opt out of IED compliance by 2020, with utilization
at these operations likely to be limited. Even with limited
output from these operations, there would be capacity
for higher coal consumption, but the ongoing growth in
renewables generation and the erosion of power demand
as efciency improves and economic growth remains slow
means that consumption is likely to edge lower.
The future of domestic supply of coal is a key consideration
for the future of imports, with several mines in the UK, Spain
and Germany unlikely to be operating by 2020.
We are forecasting European coal imports to fall to 108mn
t by 2020 from close to 150mn t seen in 2012. In any
given year there is uncertainty about consumption given
the vagaries of renewables generation, but the trend in
consumption is clearly down.
Seaborne supply reaction to low prices becoming clear
After growing in the last few years despite falling prices,
the weakness in prices in 2015 has illuminated the point at
which pressure on margins leads to a reduction in seaborne
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coal volumes. While this does not guarantee a price oor,
it does suggest that the risks to the market balance haveshifted if prices remain at or below current levels.
Indonesia and the US have been responsible for the decline
in exports as producers elsewhere have been stable or have
recorded small growth. The reduction in US exports has
been going on for a couple of years, as arbitrages to Asia-
Pacic and Europe have closed and contracts have rolled off.
65
70
75
80
85
65
70
75
80
85
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2014 2015 2013
-18mn t YTD
Note: Includes Australia, US, Canada, Russia, Colombia, China, South Africa, Indonesia
Source: GTIS, Argus
Seaborne coal supply mn t ann
Australian supply has proven to be much stickier given
large capital investments, less exible transport cost
arrangements and the buffer of a much lower Australian
dollar. Some of the growth in 2015 has been metallurgical
coal that has switched into thermal coal markets given the
weakness in steel demand.
We have not forecast any greeneld projects to come
online in Australia over the forecast horizon, with the
uncertainty about demand and prices, as well as the
regulatory environment likely to be a barrier to the large
investments required to make these projects viable.
There are expansions agged at by major producers
at browneld mines, which underpin our forecast ofAustralian exports reaching around 240 mn t in 2020. But it
is questionable how actively these will be pursued in light
of current prices.
Competition is set to remain erce in the Atlantic basin as
producers are still set to expand in the region as demand
wavers. The South African Rand, Colombian Peso and
Russian Ruble have all fallen dramatically in the last 12
months, which is keeping planned supply expansions in
play.
Colombia is still forecast to grow to over 100mn t in the
next few years, as both the Cerrejon and Drummond
expansions remain in play. The next big step up in South
African exports has proven elusive for a decade, although
we continue to assume South African shipments will reach
90mn t in the longer term. Russian producers are more
likely to expand into Pacic markets than into Atlantic
markets, although will continue to compete for market
share in growing markets like Turkey.
There are some pockets of gains, with Illinois Basin volumes
to Europe rising and some high-sulfur nothern Appalachian
coal exported to India in 2015. This should keep US thermal
coal exports stable over the forecast horizon.
Indonesian exports have fallen in 2015 after a decade of
explosive growth. The cuts to output have come across the
producer spectrum, with large listed producers like Adaro
reducing output, while small-scale miners with limited
balance sheets also falling by the wayside this year.
Indonesian producers perhaps have more exibility than
producers elsewhere given transportation to ports is lower-
cost and less capital intensive. The competitive contractor
landscape also means that Indonesian producers can react
more quickly to cash losses than peers elsewhere.
Given Indonesian producers rationalized output, how
quickly could it come back? We think large producers will
ramp up production quickly given they are running below
capacity and were planning output at much higher levels.
But it does seem unlikely that longer-term production targets
will be chased without an improvement in the outlook for
margins, which is more likely to hinge on prices moving higher.
Title unit
0255075
100125150175200225250275
2008 2009 2010 2011 2012 2013 2014 2015 Long
term
target?
Toba Bara PTBA KKGI Harum Berau ITMG Kideco Adaro Bumi
Source: Company reports, Argus
Listed Indonesian producers mn t
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The lack of growth in Atlantic markets means that producers
will have to push into other markets. Incremental supply
from South Africa seems destined to India and other
Pacic markets, while part of the expansion in Colombia is
predicated on sending coal to Asia-Pacic via the expanded
Panama canal.
The uncertainty surrounding long-term demand prospects
may see this expansion projects put on hold, although we
are waiting for conrmation of this before making a change
to our demand and supply balance
Impact of exogenous variables on costs
The large depreciation in many currencies and fall in crude
oil prices has had a signicant impact on 2015 prices.
Both factors have affected the cost curves and has led to
producers accepting lower US dollar prices rather than
curtailing production. That said, we do not know whether
producers would have cut supply if the movements in
currencies and oil prices hadnt been so large, which would
have rebalanced coal markets at a higher dollar price.
50
60
70
80
90
100
110
50
60
70
80
90
100
110
Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15
Yuan Yen Euro
Indian Rupee Australian dollar Rouble
Rand Colombian Peso
Source: FRED, Argus
Various currencies vs the US dollar Index
0
20
40
60
80
100
120
140
0
20
40
60
80
100
120
140
Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16Source: Argus
Argus year ave
forecast
Ice Brent crude oil $/bl
0
50
100
150
200
250
300350
0
50
100
150
200
250
300350
2012 2013 2014 2015 2016 2017 2018 2019 2020
USEC and US Gulf ports Russia Western portsSouth Africa ColombiaAtlantic demand
Source: GTIS, Argus
Atlantic basin supply and demand mn t
Argusis not forecasting a substantial deterioration in the
crude oil price, with the consensus looking for a pick-up in
the longer term. But like we have seen in the coal market in
the past few years, there is substantial uncertainty about the
response of supply to lower commodity prices.
We think that demand is likely to grow, and the cost of
marginal supply should determine prices. With coal supply
shrinking in China, Indonesia and the US at current prices,
variables such as the Australian dollar and the Russian ruble
should only dene the relative winners at higher US dollar
prices.
But while this has affected costs and margins in 2015,
how persistent will the recent trends in these variables be
in the longer term? In some cases, it might make sense
for variables to be lower than previously expect over the
medium term, like the Russian ruble. For others, the case for
change to the longer term is not as clear. For example, has
the ve-year outlook for the Australian dollar really changed
that much in the last 12 months?
This is part of the challenge of pinning a view on prices
based on the cost curve. While some of the variables in the
cash cost equation are unlikely to move around, other parts
impacting the equation can move around dramatically and
are inuences that are exogenous to coal markets.
China arbitrage and net trade
We believe that the path for Chinese domestic prices should
help shape the outlook for seaborne prices over the long
term. The simple rationale for higher prices in China is that
we forecast a small amount of demand growth while supply
is shrinking.
The introduction of higher import taxes and regulations
on certain qualities of imported coal and the subsequent
decline in Chinese imports has led many to question the role
of China in inuencing seaborne prices in the longer term.
If imports were falling faster than Chinese demand due to
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policymaker intervention, then would seaborne prices be
structurally weaker?
So far, the evidence is does not suggest this is the case.
Prices assessed cfr South China have been weaker than
QHD prices, although this was not unusual prior to the
introduction of policies at the end of 2014. If anything,
some price benchmarks have been surprisingly resilient. In
particular, fob Indonesia 5,500 kcal coal has priced at a small
premium to cfr South China prices over the past six months.
Fob Newcastle 5,500 coal prices have also been consistent
as a netback to cfr South China prices, even though this
40
50
60
70
80
90
100
110
120
40
50
60
70
80
90
100
110
120
Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15
cfr South China 5,500 fob Indonesia 5,500
fob Newcastle 5,500 fob QHD 5,500 ex VAT
Newcastle 6,000
Source: Argus
Coal prices $/t
-10
-5
0
5
10
15
20
25
30
35
2004 2006 2008 2010 2012 2014
-10
-5
0
5
10
15
20
25
30
35Exports Imports Net exports
Source: China Customs
Chinese thermal coal imports and exports mn t
coal was most heavily affected by Chinese regulations.
While volumes of Chinese imports of this coal havefallen, the price has not been at a widening discount
to assessments on China prices despite the additional
hurdles.
So we continue to base our longer term price forecasts
with the Chinese arbitrage price as an anchor point. This
means that the Chinese Yuan plays a particularly important
role from an FX standpoint. We are assuming a small
depreciation in the Yuan over the longer run of around 5pc,
although this should not be a barrier to the higher dollar
prices we are currently forecasting.
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Copyright 2016 Argus Media group
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Argus Direct is the next generation platformfrom Argus Media. It is the premium way to
access our reports, prices, market insight,
fundamentals data and markets.
To learn more, visit our website
or contact your account representative.