India’s shutdown for Covid-19 cleaves the Asian coal market
High quality Australian coal prices are holding up, while lower quality Indonesian coal is dropping back, writes Clyde Russell
Launceston — Asia’s seaborne coal market is increasingly diverging between higher quality Australian coal, where prices are holding up despite the economic shock being caused by the coronavirus; and lower quality Indonesian fuel, which is losing ground.
The price of Australian benchmark Newcastle thermal coal futures traded on the Intercontinental Exchange ended at $66.35 a tonne on Wednesday, down slightly from the prior day but up from the low so far this year of $65.15 on March 9.
The contract, which covers coal with an energy value of 6,000 kilocalories per kilogram (kcal/kg), has traded in a fairly narrow band so far this year, and at the close on Wednesday was only 2% weaker than at the end of last year. This is despite the massive disruption caused to the economy of China, the world’s biggest coal importer, in the wake of the spread of the coronavirus from its origin in the city of Wuhan.
While China has largely contained the virus, it has now spread across the globe, leading to increasingly strong isolation measures in many countries, with the concomitant economic fallout.
However, futures for Indonesian coal with an energy rating of 4,200 kcal/kg traded in Singapore ended at $32.61 a tonne on Wednesday, the lowest price this year. The contract is down 10.7% from its peak so far in 2020 of $36.51 a tonne on February 10, and is also 4% softer than its close at the end of last year.
What lies behind the divergence of the two main types of seaborne coal in Asia?
The most likely explanation is the current coronavirus crisis is changing market dynamics, rather than any structural change in supply or demand.
Indonesia’s coal exports have been in a range about 30-million tonnes in recent months, with China and India accounting for about 60% of the total. At the start of the year, both markets were performing well, with China actually importing more coal during its Covid-19 lockdown, due to the impact on domestic mines and transport infrastructure.
India’s imports from Indonesia were also resilient in the first two months of the year as coastal power plants increased generation, but they appear to be tapering off this month.
In the first 25 days of March, just 4.04-million tonnes of Indonesian coal was discharged at Indian ports, according to vessel-tracking data compiled by Refinitiv.
While that figure will rise by the end of month as more cargoes are unloaded, it looks certain that March’s total will be below February’s 7.96-million tonnes and January’s 7.42-million.
India has lagged the rest of Asia in being hit by the coronavirus, but the country is now taking strong lockdown measures to prevent its spread, which will curb demand for electricity to power industry.
Coal stocks at power plants and mines have also been rising, with the Business Standard newspaper reporting on March 24 that inventories were above 100-million tonnes, with stocks at plants reaching a record 41.4-million tonnes.
Plentiful stocks combined with a sharp slowdown in economic activity mean India’s coal imports are likely to slip in coming months, especially from Indonesia.
Australia’s markets stronger
Australia supplies virtually no thermal coal to India, which generally takes Indonesian coal because of its lower cost and cheaper freight rates. Australia’s trade with India is largely in coking coal used in making steel.
The main markets for Australian thermal coal are China, Japan, South Korea and Taiwan, and Refinitiv data shows these markets have been resilient so far this year. Together these four markets imported 26.8-million tonnes of both thermal and coking coal from Australia in January, the most since July last year, while February’s total was 21.22-million, up from 20.1-million in the same month last year.
With the coronavirus outbreak seemingly contained in China and Taiwan, and progress being made in Japan and South Korea, it’s possible that their imports of coal will hold up in coming months, with the main risk being the economic downturn in the rest of the world.
Assuming no shock to supply should mines be forced to close in Australia to combat the coronavirus, there is a case that prices shouldn’t decline too much, but it would be difficult to make a bullish case until the world economy is showing signs of recovery.
With far greater exposure to India, Indonesian coal prices are more under threat, and will remain so until it’s clear that the world’s second-biggest importer of coal has beaten the coronavirus.