Chinese demand for seaborne-traded thermal coal will fall sharply from 2016, dragging prices down in its wake, analysts at Goldman Sachs said this week.
In a report entitled The Tiger and the Dragon, the bank's analysts downgraded their forecast for spot Newcastle 6,000 kcal/kg NAR prices by 17% to $54/mt FOB for 2016, and by 21% to $52/mt for 2017.
The bank's analysts expect flat demand and negligible supply growth in the global thermal coal market over 2016-2019, according to its demand and supply model, with the size of the global market staying at around 5.9 billion mt/year, down 1% from 6 billion in 2014.
"We believe the seaborne market has gone ex-growth and coal prices will trade near the level of marginal production costs for the foreseeable future," the analysts said in the report.
The analysts said they also believed the international coal industry did not require any fresh investment as its existing assets were able to satisfy the market's flat demand for the next several years.
The bank estimates Chinese import demand for this year at 81 million mt, down from 131 million mt in 2014, and Chinese imports of thermal coal are expected to decline further to 55 million mt for 2016, the report said.
China had over-invested in its coal mining sector, and addressing the industry's "chronic overcapacity" was complicated by the current contraction in fuel demand that the analysts expect to continue as energy is used more efficiently in the Chinese economy.
The bank's analysts also said they believed the seaborne and domestic markets for China are diverging after being closely linked by virtue of the arbitrage between imported and domestic prices.
"We expect Chinese demand will account for 6% of the seaborne market next year, down from a 2013 peak of 17%," they said. "In our view, this could lead to a modest divergence in prices."
Indian demand for thermal coal imports is expected to finish the year at 189 million mt, from 166 million mt in 2014, while the bank's estimate for India's 2016 imports volume is 205 million mt.
Ongoing reforms to India's coal mining sector should lead to stronger domestic production that may eat into seaborne demand, the report said.
Japan's thermal coal import demand is estimated at 139 million mt for 2015, down only 1 million mt from 2014, but 2016 demand is pegged at 136 million mt.
The bank's analysts said they thought mine marginal production costs could decline by about 30% over 2014-2016, and for this reason it was downgrading its price forecast for FOB Newcastle 6,000 kcal/kg NAR thermal coal to $54 for 2016, and to $52/mt for 2017 and $51/mt for 2018.
Average mine costs for Australian thermal coal operations in 2015 were put at $66/mt on a 6,000 kcal/kg NAR basis, including about $5.30/mt for rail transport, $5.20/mt for port fees, $4.92/mt for royalties and $48.78/mt for free on rail costs, the report said.
A coming surge in global supply of LNG, perceived to be a cleaner fossil fuel for power generation than coal, was another headwind for the seaborne thermal coal market, the analysts said.
"Coal producers with the right assets (e.g. in the bottom half of the cost curve), the right address (e.g. cost base in a weakening currency), and the right management (e.g. able to deliver sustainable productivity growth) can be attractive as cash cows," the report said.
