Thermal coal forward curves are in pronounced backwardation. A consumer can currently lock in a 2017 price $11.50/t cheaper than prompt coal in the case of FOB Richards Bay, and in a worst case scenario, $6.30/t cheaper basis CFR Europe. These backwardations are more-or-less the largest we have seen since early 2011, when the spot price was almost three times what it is today. At that time, the market was buoyed by strong demand growth (in excess of 10% YoY), characteristic of commodities as a whole in the two years that followed the GFC, and low inventories. Compare that with today and we have negative demand growth, as global thermal coal consumption looks to have peaked, and large inventories. The market is in oversupply, struggling to force supply cuts, and is coming through a warm northern hemisphere winter.
In the current situation, markets with a meaningful cost of carry should be in contango. That we are seeing a large backwardation must therefore reflect an environment in which participants see little hope for recovery in the foreseeable future.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
