Volatility may persist in global thermal coal markets in H2CY23

*Higher royalty putting pressure on Indonesian miners

*Weak Chinese macroeconomic data may influence pricing in H2CY'23

*Indian buyers have little pricing power in South African imported coal market

The global thermal coal market is expected to be in a general downtrend in H2CY'23 on weak Chinese macroeconomic data. However, Indian coal imports may jack up ahead of the festive season amid higher industrial and construction demand. China accounts for around 50% of the global seaborne coal market; however, weak sentiments in China will weigh on seaborne thermal coal prices, experts at SteelMint Events' flagship conference opined during a freewheeling panel discussion.

The experts on the panel were Hendra Sinadia, Executive Director, APBI ICMA; Sunit Kochhar, VP, Rawmet; Amal Singhal, Head (Sourcing), Iron Ore and Coal, Tata International; Andrey Rybainin, CEO, Panacape; and Siddhrath Sud, Physical Coal Trader, Itochu, who moderated the session.

Key takeaways and insights on global trade dynamics:

Indonesia

*Geopolitical upheaval and trade rebalancing are favouring Indonesia. China, European markets have opened up for Indonesia post unofficial ban on Australian coal by China.

*Indonesia has reserves of about 35 bnt of coal, which will last for at least 50-60 years.

*Despite financing-related restrictions, Indonesian coal production will touch 700 mnt in 2023. Till June 2023, production is 52% of annual target. Export target is 500 mnt, 48% of target met in first half.

*India sourced 110 mnt in 2022. Until July 2023, 54 mnt has been exported to India; however, exports could fall compared with last year.

*There is disparity between HBA and market prices. Cost of production for Indonesian miners has increased by 20-25% on higher fuel costs, new royalty tariff, which is almost double, putting pressure on miners, as well as DMO.

*Export policy is unlikely to change much; coal exporters have to deposit 30% of export revenues with state-owned banks for three months, which will affect cash flows of miners.

*Investments in ESG and renewables in Indonesia are dominated by coal producers.

South Africa

*API4 prices are tagged with LNG prices and so South African coal prices have remained firm.

*Challenges related to weather and transportation of material, congestion delays, breakdowns in non-RBCT terminals, short-term supply shortage for Indian buyers amid low port stocks in India mean that in the coming 1-2 months South African coal prices delivered on CFR basis to India will increase.

*Amid higher domestic coal flows, India's demand for South African coal is sporadic. We may see a sudden spurt as well as decline in demand dictated by local factors.

*Buyers in India don't have pricing power when it comes to South African coal because of spot and fragmented buying.

*South African suppliers have found new markets in the EU, Middle East, South Korea. However, South African coal is still key for the Indian DRI sector.

Russia

*Under the weight of sanctions, Russian miners are looking towards the east. China is a huge market but logistics problems in the Russian Far East are very tight for delivery of wagons. The Russian government is working to develop railroads for effective transportation of coal.

*The western ports mainly serve the Turkish and Indian markets.

*In China, Russian PCI and some coking coal grades are not offered at discounts. In fact some brands command a premium.

*Some Russian miners are optimistic about supplying hard coking coal (HCC) to the Indian market from September onwards from the far eastern ports. In the near term, miners will follow established indexes and even consider discounts to increase market share.

China

*China's coal import quota may kick in, which is a bother because of high imports in H1 and also high inventories.

*High-to-mid-CV coal from Russia and low-CV from Indonesia find takers in China.

*Chinese imports in H2 are expected to be lower. This is likely to affect prices further.

*Safety-side interventions have impacted domestic production in China. Imports will be determined by weather conditions more than the surge or decline in industrial activity.

India

*In India, despite record-high production last year, coal evacuation problems and logistical hurdles create a gap, which has to be filled by imports. The coastal power and cement plants will continue to import coal.

*The Ministry of Power has directed thermal plants to import 4% of their coal requirement till March 2024.

*The Indian DRI sector imports around 24-25 mnt of South African coal annually and this is expected to continue in the coming years.

*The cement industry is agnostic as regards coal specifications and can use a wide range of coal grades. Pet coke usage will continue, although regulations related to sulphur content is a factor to watch out for.

Europe

*In the last one-and-a-half-years, Europe has come up with infrastructural developments to handle LNG, which were previously absent. Therefore, energy volatility seen last year is no longer that acute. So, coal prices have cooled off.

*The major LNG suppliers from Australia have faced disruptions which have pushed LNG prices higher over the last few days.

Price outlook

*No major spike in prices is expected this year. Coal prices are likely to remain range-bound.

*The ICI4 index could settle at lower than $40/t due to the ongoing macroeconomic problems faced by China. In the absence of any black swan events, API4 could be range-bound between $90/t and $100/t.

*India's exports are largely from the non-RBCT ports, which are supplied mainly through trucks. If prices fall below a certain threshold it will become increasingly unviable for the smaller miners in South Africa.