Singapore (Reuters Breakingviews) – Ask Vietnam, Pakistan and even Korea: the era of steam coal is not over yet. Banks don’t want to finance it, big miners are dropping it, and China is migrating to cleaner natural gas. But the shift to green fuels is slow, and Asia’s demand for electricity is outpacing it. That will keep prices lofty for longer than many had forecast.
Thermal coal, burned to generate energy, has few friends in high places. Developed markets like Britain, France and others are phasing it out after the Paris climate agreement, and so too is China, the world’s top consumer. Financing coal is getting tougher too, with large banks under pressure from environmentally conscious investors. Even miners are moving on, with almost no significant new projects in the pipeline. Rio Tinto , one of the world’s largest mining companies, agreed to sell its last coal asset in March.
But even if global appetite is levelling off, the Asian picture is different. In China, where consumption peaked in 2013, deep cuts are taking time. And from Pakistan to the Philippines, the need for more cheap energy means more coal-fired plants, driving regional demand. Take Vietnam, Southeast Asia’s fastest-growing economy: local coal production is limited and costly, and almost half of the country’s new electricity capacity is expected to be coal-fired. Appetite for the fuel in large existing markets – India, Korea and Japan – is holding up too.
Supply, meanwhile, is hardly likely to increase, as mines age and little new capacity comes onstream. Indonesia, the world’s largest exporter of thermal coal, has capped domestic coal prices for power stations, reducing the incentive to invest. And miners that are still betting on coal, like Glencore, are buying existing capacity, not digging fresh holes.
As a result, Asia’s proportion of thermal coal consumption is up, now standing at 70 percent, compared to less than 50 percent in 2000. More importantly, coal prices are not dropping as consensus suggested. Indeed, benchmark Australian prices have defied the usual lull at this time of year to cross $100 a tonne – the highest seasonal level in six years. Dirty, but certainly not cheap.
– Benchmark Australian thermal coal prices are at their highest seasonal level in six years, trading at over $100 a tonne. In the derivatives market, API2 2018 coal futures are at close to $84 a tonne, roughly a fifth higher than a year ago.
– The Newcastle Weekly Index, another benchmark for Australian thermal coal, ended at $95.25 a tonne on April 27, the 40th straight week it has closed above $90.
– The average forecast in a Thomson Reuters poll in March predicted spot Australian Newcastle physical coal selling for around $87 this year, then dipping to $80 in 2019 and $73 in 2020.
– Thermal coal has lost popularity with investors in recent years. Mining giant Rio Tinto been steadily divesting its coal assets and on April 5, BHP, the world’s largest miner, announced it would withdraw from the World Coal Association.
– Coal remains the most-used fuel for power generation, especially in emerging economies. Asia uses more than 70 percent of the world’s thermal coal.
By Clara Ferreira-Marques
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