Like a boomerang

Perret Associates have just released their latest Interim Supply & Demand Coal and Freight Price Forecast, which is part of their Long Term Price Forecast.

International electricity markets are going through very turbulent times, with coal, gas and freight prices, in particular, challenging or even exceeding their record levels reached over 13 years ago in 2008.

The coal rally started, as has often been the case with past rallies, with China requiring significant amounts of energy, this time to power its strong economic recovery after the COVID pandemic. Domestic coal supply has not been sufficient and Chinese end users have had to rely on imports. The already tight market has been squeezed further by the Chinese government’s decision to suspend imports of Australian coal. This has backfired on the domestic electricity market, as coal supply from other international suppliers has not been able to plug the gap. In fact, Perret Associates think that the Chinese market has all the characteristics of a “300mt per annum imports market,” given the historically low levels of inventory, but logistical constraints are making it very difficult for China to import such quantities.

Hasty decisions taken by politicians in the EU 27+ UK zone over the last 10 years or so to embark on a very rapid and expensive energy transition are also backfiring on these countries’ economies and end users. There is simply not enough wind and solar capacity to cope with normal winter conditions amid an economic recovery. European end users will get a flavour of things to come with their energy bills increasing by 10%-20%. Meanwhile, governments will have to pick up the bill for the difference by way of subsidies, although these too will ultimately have to be paid for by the same end users by way of higher taxes. 

The effect of a structural lack of investment in the coal supply chain since 2015 has also raised its ugly head in the market. The case of South Africa illustrates the extent of the problem, with Perret Associates forecasting that the country’s steam coal exports will drop in 2021 by a massive 11mt or 15% y-o-y, despite FOB Richards Bay prices approaching record levels at $170/t. In normal circumstances, exports should increase significantly at such prices.

Perret Associates forecast a significant international supply deficit in 2021 which could extend into H122. In parallel, world inventories are at record lows. International coal remains very competitive against gas in Europe as well as domestic Chinese material and from that perspective only, there is still non-negligible upside for coal prices, as the market is going through a global reset.  

Still, significant downside risk is also building up in the medium term, as examined in the price forecast sensitivity analysis contained in the report.

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