Thermal coal – Lower Chinese imports = big market problem
Given the substantial cost deflation this market has experienced, China’s massive protectionism which means that imports are running 50% down YoY, the fact that China continues to overproduce domestically and that less than 10% of the seaborne industry is cash negative at current (Newcastle) price levels, we think there is at least $10/t of downside to current spot prices. Quite simply, seaborne producers no longer have the same ability to push surplus tonnes into China and they now need for feel sufficient pain to cut supply. There are signs that these cuts have started in Indonesia, but there is a long way to go. And even if these cuts materialise, price gains are likely to be reliant of cost inflation reasserting itself, since there isn’t a particularly compelling ex-China demand story. Much rests on India and it is looking like Indian domestic supply is slowly getting its act together. We have downgraded our 2016-2019 spot price forecast by 10-15% and have lowered our Japanese contract forecasts by circa 10% each year.
The Budget says $66. Mac says $55. I say $50 on its way to $40.
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.