Chinese supply reforms are likely to continue to drive Asian seaborne thermal coal prices, which will have a knock-on effect across the globe, a Wood McKenzie analyst said Thursday.
The supply reforms "are not finished," Prakash Sharma said during the company's Global Thermal Coal Market Drivers webinar. "They are kind of a work in progress ... the Chinese coal industry is still a very complex industry and the whole market is in transition, moving away from very significant high demand to lower levels of demand going forward, so industry reforms and the pace of those will be important."
In an effort to shore up declining domestic coal prices and address environmental concerns, the Chinese government in 2016 committed to a long-term goal of reducing its annual production by 1 billion mt by 2020, said Sharma.
For the near-term, it also reduced the number of days mines could operate -- from 330/year to 276/year.
But the resulting supply shortage pushed up domestic prices, along with seaborne prices.
S&P Global Platts' FOB Newcastle 5,500 kcal/kg GAR assessment rose from its 2016 low of $39.30/mt in mid-February to a peak of $89.75/mt by early November.
Prices then declined after the Chinese government suspended the operating days policy in November, and decided in late March not to reinstitute it.
But if prices do climb again, or fall too low, the Chinese government will likely make policy changes to bring them within an acceptable range, said Sharma.
Sharma said absent additional supply reforms from China, Wood McKenzie expects seaborne prices to decline to close to the marginal cost of roughly $60-$65/mt by the end of 2018.
Platts on Thursday assessed FOB Newcastle 5,500 kcal/kg GAR at $65/mt, down $2 on day.
However, should China reinstitute its 276 operating day limit, Sharma said there could be significant upside for seaborne coal prices.
Longer term, seaborne coal demand is likely to increase, from roughly 900 million mt in 2016 to more than 1 billion mt by 2035, driven mainly by southeast Asian countries such as Malaysia, the Philippines, Thailand and Vietnam.
Sharma noted that are several risks to the projected growth, including decarbonization, the growth of renewables and the potential for breakthroughs in energy storage technology.
