JOHANNESBURG - The coal price rally is expected to get derailed over the next two years amid expectations that China and India, the world’s two biggest consumers of the energy source were likely to address domestic issues that have facilitated the strength in prices.
Afriforesight chief energy economist, Charles Kieck said South Africa’s coal producers were sitting pretty, having enjoyed high coal prices last year, although the recent strengthening of the rand has spoiled the party a little.
“ We see coal prices coming down a bit, which is not good. The performance of South Africa’s coal producers also depends on what is going to happen to the rand on the other side of revenue. We see the rand weakening as some of the Cyril Ramaphosa hype fades, which is good for producers,” said Kieck.
The rand has strengthened on the outcome of ANC’s elective conference in late December, from R13.53 to the US dollar to below R12 to the US dollar as financial markets favour Ramaphosa as president of the ANC and South Africa.
Kieck also said in the 11 months to November South Africa had exported 72.9 million tons of coal, compared to 74mt for the full year ended December 2016.
“Exports for 2017 should be up from 2016, and should stay more or less the same for 2018. We should have slightly lower exports to India as they sort out internal problems. Exports to Pakistan, Egypt and the Middle East should continue to grow, but these are still small growth markets.”
“In India, there is a preference for South African type of coal which is of relatively high quality. All new power stations coming online in India are designed to use this higher quality coal and South Africa is expected to steal market share from Indonesia because of the high quality of coal.
In both India and China, there is a drive to move away from coal with Beijing moving away from coal to battle pollution, and India moves away from imports to boost its local industry.
Kieck said over next two years there would be a downward trend for coal prices as issues in both China and India fade.
“Exports to India are a big influence on South African coal. India is trying to wean itself from importing coal and is encouraging local production,” Kieck said. But, the large state producer Coal of India (around 80 pdercent of Indian production) was notoriously bad at reaching its production targets – so this import window would remain open for a while yet.
Kieck also said that South African coal producers had benefited from critically low stocks at many Indian power stations.
“The problem is that India saw a sudden sharp drop in nuclear, wind and hydro power. Many India power station were caught off guard, and there was a shortage of coal following the season decline in production over the monsoon period. The problem was exacerbated by internal rail issues, that resulted in power stations running out of coal. As a result Imports from South Africa benefited a lot from around August last year.
That is why the Richards Bay price is also high,” he said. The Newcastle coal price is $106.5 ton and $97.5 a ton in Richards Bay.
Kieck said the biggest problem in China is the environment (in his post Communist Party Congress speech in October, Xi Jinping mentioned the “environment” more often than the “Economy”) , and the government of that country has stepped up efforts to tackle the burning of coal in a bid to fight pollution.