Thermal coal in Asia is trading at its highest level since November 2016, supported by the strength of the global economy.
Burnt in power stations to generate electricity, thermal coal is the fuel that powers Asia’s industrial engine, which is humming at the moment. It is also a big source of profits for producers for miners like Glencore and Whitehaven and Yancoal.
The benchmark for the vast Asian market is thermal coal from the Australian port of Newcastle with an energy content of 6,000 kcal/kg. It was assessed at $103 a tonne on Friday by Argus, a price reporting agency, its highest level since November 2016.
Coal-fired power generation rose in most of Asia’s major economies last year, boosting demand. At the same time, no new supply is entering the market because of dearth of new projects. Banks and investors are increasingly reluctant to back new coal projects because of concerns about global warming and emissions.
As well as the strength of the Asia industrial cycle, analysts say other factors have helped push up thermal coal in Asia. China is allowing more coal-fired power generation this winter because of gas shortages and has loosened import restrictions, while domestic production in India has yet to pick up meaningfully and there is heavy congestion at ports in Australia.
“Supply is still very tight, probably not going to catch up with demand easily in January and February”, said Shirley Zhang, principal analyst at Wood Mackenzie.
Traders reckon thermal coal could remain around $100 a tonne ahead of the annual contract negotiations between Japanese utility companies and Australian producers. These are usually led on the Japanese side by Tohoku Electric Power and by Glencore on the mining side.
The April-March contracts historically accounted for up to half of Japan’s annual thermal coal imports and they are used as a benchmark across the region by other consumers.
Japanese power utilities are prepared to pay a premium to secure supplies from Australia on long-term contracts because the coal works well in their boilers and meets environmental controls.
Last year the contracts were settled at $85 when the prevailing price was $76.48. A price of $90 this year would deliver a big windfall for Glencore, which produces coal at $48 a tonne.
Source: FT.com
