India Ratings expects domestic coal consumption growth in India to remain tepid on account of subdued demand from thermal power plants, with an expectation of power plant capacity utilisation remaining sub-65% in the medium term.
It has estimated that prices for the benchmark Newcastle coal with 5,500 calories of energy value will hover between $50 per tonne and $60 per tonne between 2018 and 20220.
India Ratings feels that government’s policies on large seaborne trade and persistent substitution to renewable energy are likely to have a significant influence on coal prices.
However, India’s domestic coal production is all set to increase on account of government efforts to reduce imports. The higher target is partly to be met by production in coal blocks fraught with clearances issues.
“Given domestic coal availability is likely to increase, thermal coal imports are likely to decline by 15-20 million tonnes annually over the next two-three years. This would affect global seaborne trade,” it said in a report.
Freight costs and volume-based taxes make an economic case for steady demand for high-quality coal. For instance, India doubling clean energy cess to Rs 400 per tonne reduces the economic value of low-quality coal.
Ind-Ra believes investment in new coal projects is likely to remain subdued globally due to gloomy long-term demand prospects. Many top global suppliers may not invest in raising output, creating a strong floor for prices. China has committed to cut 800 million tonnes of capacity over 2016-2020; it had cut about 250 million tonnes as of October 2016.
Although coking coal prices are likely to weaken in 2018 due to a production recovery in Australia and China, the average price for the full year may continue to remain high compared with that for first half of 2017 due to continued supply-side constraints and low inventory levels.
However, with the restart of idle sites and new capacity ramp-ups, supply from top producer countries could improve in 2019. Ind-Ra estimates medium-term price of coking coal at about $ 100 per tonne.
Reinstatement of lower mining days and higher-than-expected capacity curtailment by China, increased regulatory constraints on exports, major upward revision in royalties or taxes, any force majeure events constraining global mining activities or global supply movement may pose an upside risk to prices.
Higher-than-expected volume ramp-ups by large global miners and proliferation of renewables, major downward revision in royalties or taxes, and major decline in global economic activity may pose a downside risk to assumed prices.
Source: The Economic Times