by Chris Becker
Macquarie are out with a research note that won’t make the carbonised troglodytes in the Liberal Party happy, suggesting that coal prices have peaked after recently reaching $90 per tonne. They put the recent rally down to seasonality, not a new macro trend:
While Chinese coal supply has been recovering back to levels not seen since late 2015, demand continues to outpace supply. Recently introduced port restrictions appear to be having little impact on the appetite for coal imports among Chinese buyers, and given Chinese domestic prices are above the government target range, we would expect imports to be allowed to continue unchecked near term until coal prices ease again once power demand passes its seasonally strong period.
The slowdown in thermal power generation growth in China since the new year has been very mild, with total generation up 5.2% YoY in June, albeit the slowest pace of power generation output growth since July 2016. Hydro power generation has been recovering from its weakness earlier in the year, but still declined by 1.9% YoY in June, and as a result thermal power output rose 6.3% yoy in June, according to NBS data.
Peak seasonal power demand tends to run through most of July and into early August, but then fades into September.
Coking coal prices have also been firming in recent weeks given the ongoing strength in ferrous prices and margins. Spot premium HCC prices according to TSI have recovered back to $176/t this week, from recent lows of $141/t in mid-June.
Chinese buying has been the driver for the recovery as seaborne prices have been below Chinese contract prices, but at $176/t the arbitrage is largely closed and thus we are sceptical that prices will run much further from here.
While the recent coal price strength has clearly been demand led rather than influenced by any major supply issues, we should expect prices to fade naturally as peak demand season fades into September. Thermal coal prices should fall back into the government target range by late 3Q, but as they do we can expect to see a renewed clampdown on coal imports.
The end result is with so much supply coming back onto the seaborne market, with Aussie shipments about to ramp up going into the second half of this year, spot prices are inevitably going to come under huge pressure as demand drops. Good news environment, bad news coal stocks and Budget bottomline.