1. Coal rises from the ashes, rally to last until 2017

Coal rises from the ashes, rally to last until 2017

Talk of coal's demise is proving premature, with prices soaring from 10-year lows this year and further rises on the cards into 2017 as the "dirty" fuel continues to be very much in demand for power generation.

By: | Singapore/london | Published: October 5, 2016 4:30 PM
Talk of coal's demise is proving premature, with prices soaring from 10-year lows this year and further rises on the cards into 2017 as the "dirty" fuel continues to be very much in demand for power generation. (Reuters) Talk of coal’s demise is proving premature, with prices soaring from 10-year lows this year and further rises on the cards into 2017 as the “dirty” fuel continues to be very much in demand for power generation. (Reuters)

Talk of coal’s demise is proving premature, with prices soaring from 10-year lows this year and further rises on the cards into 2017 as the “dirty” fuel continues to be very much in demand for power generation.

A global push to reduce greenhouse gas emissions in favour of renewable energy has seen investors and funds ditch coal assets for cleaner sources.

But coal is still the world’s second primary fuel after oil, according to the International Energy Agency.

Following half a decade of steady decline, thermal coal physical and futures prices have all rallied between 50 and 80 percent this year, taking many in the industry by surprise.

The price recovery is a boon for mining companies, such as Whitehaven Coal, Rio Tinto, and Glencore , and stands in sharp contrast to forecasts by Goldman Sachs and the International Energy Agency, who have said coal is in terminal decline.

Tightening market conditions in both the Atlantic and Pacific basins mean that further price rises are possible, as demand picks up from Europe to Asia and as supplies fall.

“I don’t think this rally is over yet. There is still price upside for physical markets for the fourth quarter and into Q1 2017,” said Rodrigo Echeverri, head of coal analysis at commodity trading house Noble Resources in Singapore.

CASH INJECTION

Several traders say an influx of new cash into API2 coal futures, which have risen almost 80 percent this year to over $65 per tonne, was also a sign that miners and speculators are buying into a higher market.

Strong import demand from China, following domestic mining caps which have forced power generators back into the import market, as well as low coal stocks in South Korea, have tightened the market in Asia, Noble’s Echeverri said.

There is lower coal supply from Indonesia and Australia due to cutbacks but also heavy rainfall this year, which has squeezed the market and pushed prices higher, traders said.

Demand has even increased in Europe due to lower nuclear power availability in countries such as France and Belgium; lower wind and hydro power generation so far this year and expectations of a cold winter for the rest of 2016.

Nevertheless, the future for coal in the longer term is less rosy. Nations agreed in Paris last year to unprecedented rates of decarbonisation, which will require a radical shift from fossil-fuel based power to clean energy.

This has prompted many countries, such as Belgium, Britain, Austria and Portugal and others in Europe, to close coal plants in favour of renewables and nuclear. Several countries are introducing increasingly stricter measures to limit emissions from power plants.

Hundreds of investors, such as the Rockerfeller Family Fund and Norway’s state pension fund AXA, are also divesting from fossil fuels.

Yet at the same time, some countries, such as Australia, Poland and Turkey have plans for new mines and to build more coal plants to secure their energy independence or meet growing energy demand, as the fuel remains relatively cheap.

Even though traders say recent price increases had been warranted given the tighter market, they warned that far higher prices are unlikely.

“I can’t see (Newcastle) thermal coal going to $100/tonne any time soon, especially with the Chinese now relaxing their production constraints,” said a coal investment advisor who did not want to be identified.

To rein in spiralling costs for utilities, China in late September relaxed some of its previously introduced mining caps.

“The (Chinese) initially worked out (the regulation) on the basis of a $60/tonne price; now it’s hurting their steel business so I think they really need to ramp up production again to see the price go back to around $55/tonne,” said Wayne Bryan, analyst at consultancy Alfa Energy.

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