Market and product

Seaborne thermal coal prices are expected to stay "higher for longer" as China is seen remaining a strong importer amid limited output growth, Citi analysts said Tuesday.

Citi analysts raised their forecast for Newcastle 6,000 kcal/kg NAR to $85/mt FOB for 2019 from $75/mt. They also forecast Newcastle price at $80/mt FOB for 2020, up from their previous view of $65/mt FOB.

Seaborne thermal coal prices have been on a steady rise in the past 18 months amid strong Chinese demand as well as supply tightness at various producing origins. China's total coal imports in 2017 rose 6% on year to about 271 million mt. The country had imported about 204 million mt in 2015.

Newcastle 6,000 kcal/kg NAR prices have risen to multi-year highs, trading above $100/mt FOB since December 2017, according to S&P Global Platts data. The price had fallen to as low as $48.50/mt FOB in January 2016, Platts data showed.

"We continue to expect that thermal coal prices will decline modestly through 2018, in our base case, as output in China is expected to rebound during 2018 largely replenishing stockpiles at domestic utilities," the analysts said.

"Yet in the medium term, China should remain a strong coal importer from the seaborne market, since rising domestic coal producing costs and limited prospects for large-scale supply additions due to stricter environmental and safety regulations should allow seaborne coal to stay competitive for much longer than previously expected." In 2017, China mined 3.45 billion mt of raw coal, up 3.2% year on year, according to China's National Bureau of Statistics.

Stricter Chinese environment protection and safety policies, along with the structurally challenged long-term outlook for thermal coal demand growth amid falling coal mining investments, are contributing to near-term market tightness, the analysts said.

Capital expenditures on coal in China and outside China are falling significantly, and this lack of investment in the supply side should be supportive for prices and producer margins amid strengthening demand in Southeast Asia, the analysts noted.

"Further, the reduction in coal mining capex may leave coal prices prone to spikes on unanticipated supply disruptions," they said.

The Chinese government is also expected to struggle to drive up domestic coal production to bring down prices, while costs for domestic miners are expected to see a steady increase, Citi analysts said.

"Though we now expect prices to remain higher for longer, we nevertheless remain directionally bearish on coal prices over the forecast horizon as thermal coal demand is set to be structurally challenged by rising renewable energy and falling power intensity per GDP," they added.- Platts -