India Ratings and Research (Ind-Ra) believes the thermal and coking coal import prices would remain elevated in the near term on account of sustained Chinese demand and supply concerns due to the resurgence of Covid-19 infections in key coal supplying countries, disrupting logistics along with limited cargo availability. Domestic coal production and offtake are likely to be lower on the onset of monsoon season and the consequent lower-end-user demand, supported by the higher month-on-month (mom) inventory levels at end-May 2021.
Marginally Higher Domestic Offtake & Production Despite Second Wave: Coal offtake increased 2.3% mom in May 2021 to 60.9 million tonnes (MT) on higher re-stocking needs prior to the onset of monsoon season, despite a 6.0% mom lower domestic power demand due to the state-wide lockdowns amid the second covid wave. Moreover, the offtake increased 43.3% year on year (yoy) in May 2021 on a low base because the country was under stricter lockdown norms last year. Domestic coal production increased 1.7% mom in May 2021 to 47.5MT and was higher 6.4% yoy due to limited covid-led disruptions in May 2021 compared to May 2020.
Consistent Rise in Thermal Coal Import Prices: Import prices for Indonesian-origin thermal coal, primarily consumed in the power sector, continued to increase 9% mom up to end-June 2021 on production and supply disruptions due to heavy rainfall, a sustained Chinese demand, relaxed Chinese import quota for June 2021 and re-stocking requirements ahead of the monsoon season. On the other hand, South Africa-origin thermal coal prices, primarily used in sponge iron manufacturing in the steel sector, increased by 9%-11% mom at end-June 2021 on continued supply disruptions in the transportation services to the Richards Bay Coal Terminal in South Africa amid stricter lockdowns post rising infections, limited cargo availability, limited stocks on Indian ports and a sustained high Chinese demand.
The persistent increase in thermal coal import prices is likely to be further supported by the resurgence of Covid-19 infections in both Indonesia and South Africa, leading to supply concerns in the near term. Additionally, planned port maintenance activities in South Africa in mid-July 2021, temporarily disrupting supplies further, and the sustained Chinese demand shall provide a further upside over the next month, despite a likely improvement in China’s domestic coal production post resuming mining activities after the extended safety inspections.
Surging Coking Coal Import Prices: Despite China’s continued aversion to imports from Australia with zero imports over December 2020-May 2021, the import prices of Australian coking coal continued to shoot up, increasing by 29% mom up to end-June 2021 on high ex-China demand and re-stocking demand prior to the monsoons. While China’s coking coal import volumes reduced 2.01% mom, Australia’s coking coal export volumes increased 3.28% mom indicating a strong ex-China demand. Furthermore, the resurgence of covid infections in Mongolia, which primarily substituted Australian coal supply to China, has created supply tightness and led to higher port vigilance in China, leading to delays in the receipt of coal.
Strong short supply ex-Australia and limited cargo availability shall support import prices in the near term, partly countered by a low demand for coking coal during the monsoon season due to increased moisture content and a lower demand from end-user steel sector.
