In its latest energy commodities update the bank said that the thermal coal market was still heading south while metallurgical coal was “well balanced”, with met coal prices recovering in November after drifting down in late October from its four-month sideways movement.
NAB said the three-week closure by Australia’s largest coal miner Glencore of its mines would cut around 5 million tonnes of production from its Australian assets and reflects the weakness in the market.
The bank forecast the production cuts and seasonal purchases to provide some short-term support for thermal coal spot prices leading into annualised contract negotiations.
That said, NAB has revised down its thermal coal forecast for the 2015 Japanese financial year to $US72.50/tonne from $80/t.
Japanese demand for imported thermal coal could weaken in 2015 with plans to restart nuclear generation. A restart at two reactors at Sendai has been approved, with the Abe government seeking resumption.
Stockpiles in China are still elevated, with combined measures at mines, ports and power stations remaining above 300 million tonnes for almost three years, according to Chinese coal resource portal SXCoal.
In early November, stocks at major power plants were hovering around an all-time high of 98Mt, which NAB said reflected weaker thermal generation in recent months – though this was partially driven by increased hydroelectric power.
While China’s total electricity generation rose by 5.7% over the first 10 months of the year, thermal generation comprising coal and natural gas rose by just 0.7% year-on-year over the same period with the growth rate negative from July onwards. In contrast, hydro has grown by 26%, with the share of total generation rising from 15% to 18%.
The thermal coal story is a far cry from met coal, where NAB expects a “modest recovery” in prices, reflecting its expectations of further production cuts due to poor profitability conditions for producers.
“However, we have lowered the profile of our forecasts given the ongoing weakness in spot prices,” NAB said.
“Prices are expected to trend up across 2015 to $125 by the end of next year.”
NAB noticed a “significant increase” in Australian exports of met coal, with global trade increasing over the first nine months of the year by 4.9% yoy, while exports from Australia – by far the largest exporter – rose by over 11%.
The bank said met coal spot prices drifted down from its four month sideways track in late October – down to around $111/t – before recovering in November and trending back to around $113 a tonne, the typical level evident since June.
The stability of metallurgical coal prices across recent months highlights a market that is well balanced, with production cuts from various producers since the start of April largely managing excess supply. Estimates from Bloomberg Intelligence suggest that roughly 20Mt of annual capacity has been taken offline since this time, with the bulk in North America.
In the current market, cash cost estimates by Wood Mackenzie suggest that around one-third of global output is unprofitable at current prices. This environment will contribute to delays in new projects globally.
NAB also noted that China’s imports of metallurgical coal have remained weak. In the first 10 months of the year, China’s imports totalled 50Mt – a yoy decline of 18%.