Global trade change will ensure thermal coal supply: Wood Mackenzie

By Alexander Ginting

Wood Mackenzie said at the second day of Coaltrans India on March 14th that a significant growth in demand for seaborne thermal coal from China and India - the top two demand drivers by 2030, will lead to a change in global trade patterns.

The increase in the seaborne trade will ensure the long-term security of thermal coal supply in the Asian region.

Despite forecast ample supply, Wood Mackenzie indicated that investors and buyers should expect prices to stay at traditionally high levels over the foreseeable future.

"China has evolved rapidly to become the world's largest thermal coal importer with seaborne demand set to grow from 175 million tons per annum (mtpa) in 2011 to 1 billion tons per annum (btpa) by 2030. India is also set to overtake Japan as the second largest consumer of thermal seaborne coal by 2030, growing from approximately 80 mtpa in 2011 to 400 mtpa. India's demand may be even higher if domestic supply is constrained by delays in associated rail and port infrastructure projects," said Coal Market Analyst for Wood Mackenzie Prakash Sharma.

A major expansion in global thermal coal trade, concentrated on Asia and driven by demand from both China and India, is expected over the next 20 years, while rapid economic expansion will fuel demand for electricity, and the heavy reliance of Asian economies on coal will lead to an increase in trade flows.

In the near-term, the market will be tight but a significant growth of thermal seaborne supply is expected to come from existing and emerging basins, creating a change in trade flows that will feed long-term demand. "With Asia at the centre of future thermal coal import requirements, current Pacific Basin suppliers will be first in line to benefit. Waiting in the wings though are emergent players some of which, particularly in Australia and the US, will make up a significant portion of their region's future supply growth," he said.

Sharma pointed out that the emerging basins to keep an eye on Australia's Surat and Galilee basins, Indonesia's Kalimantan and Sumatra basins as well as basins in Mozambique, Mongolia, Russia's Far East, and the west coast of the United States.

"South African coal will continue its migration from Europe to Asian markets, and other Atlantic Basin suppliers such as Colombia and the eastern US will also participate, albeit marginally," he added.

Despite aggressive expansions in thermal coal supply, long-term prices will defy expectations of a drop in prices, instead remaining high in the seaborne market.

There may be short term seasonal fluctuations such as a dip in Q2 prices this year due to economic uncertainty but in the long-term, the Newcastle reference coal price will increase progressively and is forecast to remain above free on board (FOB) US$120/ton in real 2011 US dollar terms.

The high prices can be attributed firstly to higher production costs and the substantial investment required in new mines and supporting infrastructure development particularly for new reserves from significant emerging basins.

These are in remote regions far away from exiting port facilities. Secondly, cost pressures come from changing fiscal regimes such as the carbon tax in Australia and minimum export price regulations in Indonesia. Lastly, Wood Mackenzie expects a declining trend in export thermal coal quality as large volumes of low rank coals from Indonesia enter the seaborne market.

"Demand for seaborne thermal coal will grow exponentially from now until 2030, particularly as a result of China and India's needs. While this demand will find supply from a change in trade flow patterns, we think that prices will not weaken with the oncoming supply. Rather, cost pressures, infrastructure bottlenecks and a decrease in export coal quality all combine to hold prices at traditionally high levels," Sharma summarized.

Editing by Er Audy Zandri