India Ratings and Research’s price assumption for the benchmark thermal coal (Newcastle 5,500 calories) for financial year 2018-2020 is a band of $50-60 per tonne. Government policies in large seaborne trade participants and persistent substitution to renewable energy are likely to have a significant influence on coal prices.
India Ratings’ price assumption is based on expected full cycle costs, comprising expected cost of production of major global merchant miners, cost of finding and development, rate of return on investment and global demand-supply levels.
Competition From Renewable Alternatives
Competition from renewable energy will continue to increase, with technological advancements reducing capital costs. Renewables contribution to global primary energy needs is likely to grow at a faster pace, increasing to 4 percent by 2020 from the current estimated 3.0 percent.
Tightrope Walk By China
Two-thirds of China’s energy requirements over FY18-20 are estimated to be met by coal. The relaxation of supply control in 2016 was aimed at preventing a delay in mining capacity rationalisation, ensuring sufficient energy supply and profitability of power producers. Hence, the risk of reversion of restriction on mining days is limited.
Expansion In India’s Domestic Coal Volume
India’s domestic coal production is all set to increase on account of government efforts to reduce imports. The higher target is partly to be met by production in coal blocks fraught with clearances issues. Ind-Ra expects domestic coal consumption growth in India to remain tepid on account of subdued demand from thermal power plants, with an expectation of plant load factor remaining sub-65 percent in the medium term, as indicated in FY18 Power Sector Outlook and FY18 Infrastructure & Project Finance Outlook reports. Given domestic coal availability is likely to increase, thermal coal imports are likely to decline by 15-20 million tonnes annually over the next two-three years. This would affect global seaborne trade.
Steady Demand for High-Quality Coal
Freight costs and volume-based taxes make an economic case for steady demand for high-quality coal. For instance, India doubling clean energy cess to Rs 400 per tonne reduces the economic value of low-quality coal.
India Ratings believes investment in new coal projects is likely to remain subdued globally due to gloomy long-term demand prospects. Many top global suppliers may not invest in raising output, creating a strong floor for prices. China has committed to cut 800 million tonnes of capacity over 2016-2020; it had cut about 250 million tonnes as of October 2016.
Coking Coal Supply Constraints
Although coking coal prices are likely to weaken in FY18 due to a production recovery in Australia and China, the average price for the full year may continue to remain high compared with that for the fist half of FY17 due to continued supply-side constraints and low inventory levels. However, with the restart of idle sites and new capacity ramp-ups, supply from top producer countries could improve in FY19. India Ratings estimates medium-term price of coking coal at about $100 per tonne.
Positive: Reinstatement of lower mining days and higher-than-expected capacity curtailment by China, increased regulatory constraints on exports, major upward revision in royalties or taxes, any force major events constraining global mining activities or global supply movement may pose an upside risk to prices.
Negative: Higher-than-expected volume ramp-ups by large global miners and proliferation of renewables, major downward revision in royalties or taxes, and/or major decline in global economic activity may pose a downside risk to assumed prices.