Coal prices likely to stabilise in the current quarter; may drop in Q4

Thermal coal prices are expected to stabilise during the current quarter before easing in the fourth quarter. The extreme heat that boosted its offtake the past month-and-a-half is likely to abate, with expected increase global output.

Coal futures almost topped $150 a tonne last week, the highest in the past ten years as a heat wave swept across Zhejiang, Jiangsu and Guangdong provinces of China, the Trading Economics website said. The heat wave resulted in electricity consumption soaring to “unprecedented” levels in industrial regions even as local supply was limited.

Also, drought in the Communist nation affected the generation of hydropower in Yunnan province, while China’s trade controversy with Australia affected imports.

Up 80 per cent year-to-date

Coal prices, ruling at $146.17 a tonne on Monday, have gained about 80 per cent since the beginning of the year. Since May, they have increased by 40 per cent.

Given these developments, Fitch Solutions Country Risk and Industrial Research (FSCRIR) said it had raised its average price forecast to $85 a tonne from $72. The raise also comes on “account of stronger than anticipated rise in prices over the year-to-date”, it said in its recent outlook.

This will result in prices peaking in the current quarter as the strong Chinese demand will normalise, and Beijing will release stocks from its strategic reserves. The high prices will also encourage mining restarts adding that prices could steadily decline from the fourth quarter onwards.

EIA short-term outlook

The US Energy Information Administration has, in its short-term outlook, pegged the average price of coal at $56.7 a tonne this year compared with $53.9 last year.

Wood Mackenzie, global energy, metals and mining research and consultancy group, said in its short-term outlook note that the coal market could see further tightness as China has relaxed coal import norms.

Prices surged in June to levels that were not seen since 2011, with demand for coal being “remarkably strong”. Lack of “sufficient supply response” fuelled the surge in prices, it said.

Fitch Ratings, whose authoritative source is Fitch Solutions, said prices for the benchmark Newcastle 6,000kcal/kg grade coal had increased by 52 per cent since March to $136/tonne, supported by tight supply in China.

It said that coal prices could come under pressure as the Xi Jinping government has arranged for more supply, including the resumption of production.

The recent rally could also be attributed to demand for high-grade thermal coal from Japan and South Korea, which too were impacted by the heat wave.

Reasons for price easing

FSCRIR said that coal scarcity would ease owing to three reasons in the coming months.

One, the heatwave will abate leading to a drop in prices in China, the world’s largest consumer of energy commodities.

Two, the Chinese government will release 10 million tonnes of stocks from its strategic reserves which will impact the prices. This indicates that Beijing wants to drive the costs lower for its utility firms, it said.

Three, the price surge will help buoy global production that had gone offline during the Covid pandemic last year to come online. In particular, it sees disruption to bea minimum in India and Russia, helping to ramp up production.

FSCRIR said coal prices are expected to drop long-term, with environmental laws, particularly in China, playing a pivotal role in reducing demand for the commodity.

It estimated coal prices to average lower at $60.1 a tonne during the current decade to 2030 compared with $85 this year and $79.1 tonne in the last five years.

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