South African coal prices on fire. What is fuelling the rally?

South African (SA) thermal coal prices are on fire since the second quarter of this calendar. After remaining volatile over Jan-Apr'21, prices started showing an upward trajectory from May'21 onwards, spurting from an average monthly $84/t FOB in May'21 to $110/t FOB in Aug'21, a 31% rise over four months. The rates are currently nudging at steep $170/t levels.

Incidentally, South Africa produces around 300 mn t of Thermal Coal annualy, out of which it exports around 70 MnT and consumes around 200 MnT.

Reasons for the price spurt

The single-most important factor behind this spurt, of course, is China, whose voracious appetite has been fuelling the global coal price rally of late.

• China's Australia ban is SA's boon: Global coal prices have been spurting ever since China slapped the ban on Australian coals in Oct'20. It was the largest buyer of thermal coal from Down Under. However, post-ban, the trade dynamics changed drastically with China turning to other origins like Indonesia and South Africa. It resumed buying South African thermal coal after a hiatus of five years post-ban, procuring mainly the RB1 (6,000 NAR), which is highly similar to the category it used to buy from Australia. However, China buys both RB1 and RB2. China's import volumes from SA in Jan-Aug'21 touched 4.37 million tonnes (mn t) against nil in the year-ago period.
  
  
• Domestic coal shortage: China is also facing a domestic coal shortage due to increased safety inspections at its mines. The country is the largest producer and consumer of thermal coal. But domestic production has been curtailed, driving it to procure most of its thermal coal from Indonesia.
  
  
• Indonesia issues: However, this South East Asian country has its own issues. First, it has to meet its own domestic obligations. That apart, Covid and heavy rains impacted production, disrupting shipments to China. Facing a supply crunch from its main supplier, China turned towards South Africa. Imports from Indonesia into China in Jan-Aug'21 were up 30% y-o-y to almost 20 mn t against 15 mn t in CPLY but may be impacted in the second half.
  
  
• Power utilities rush to stock up: Chinese power utilities are in a rush to procure steam coal. They have been asked to increase their imported coal procurement as part of winter restocking. The directive is that utilities should procure in higher volumes in the off season to stock up for the winter heating season. Further, they have been asked to enter into long-term supply agreements, which is driving them to stock up. Total thermal coal imports into China in Jan-Aug'21 touched almost 51 mn t compared to 68 mn t in CPLY, lower because of strict environmental issues that have entailed steel production cuts.
  
  
• Severe north-east Asian winter? Also, with expectations of a more severe winter in north-east Asian countries like China, Japan and South Korea, all three have been actively trying to stock up on thermal coal in autumn, especially since the latter two countries lack coal mines and rely totally on imports. With expectations of higher consumption from these countries, the market is active and prices are expected to stay firm.
  
  
• SA logistics hit exports: Overall, exports of SA thermal coal have dropped 19% to 38 mn t in Jan-Aug'21 to from 47 mn t in the corresponding period last year (CPLY), on the back of a 30-wagon train derailment in July and a civil unrest. The latter led to severe disruptions in coal and other mineral export shipments in July. Moreover, the maintenance-led disruptions at Transnet, the nationally-owned logistics behemoth, were further aggravated by bad weather and derailment issues, which pushed up prices further mid-year.
  
  

Indian buyers feeling the heat

India is a major buyer of South African coal. But buyers here are unable to turn to Australian thermal coal either which is equally on fire, fuelled by ex-China buying. The Australian 5,500 NAR price has risen to $137/t FOB from around $39/t FOB a year back, a y-o-y increase of $100/t!

However, there is strong demand for the South African RB2 (the most preferred grade) from Indian sponge iron manufacturers because of limited supply of domestic coal, most of which is getting diverted to the power sector since it is facing a critically low coal stocks scenario.

However, Indian imports of SA thermal coal are down 25% in Jan-Aug'21 to 17 mn t against 24 mn t in CPLY due to supply disruptions.

Outlook

South African coal prices are expected to stay firm in the medium term buoyed by Chinese demand. Moreover, chances of a cyclone in Australia may hit supply and push up prices further Down Under, which may support higher South African prices.