ICMA WEBSITES – EDITORIAL (10 AUGUST 2020)
Weak Demand Triggers Price Downturn
Coal Reference Price (HBA) August reported at US$ 50.32, the lowest price in the decade. The price downturn is caused by substantially weak demand amidst the Pandemic Covid-19. Meanwhile, the supply has been relatively strong despite lower than the previous year. This trigger wider gap of oversupply in the global thermal coal market. The big oversupply gap was actually recorded since August 2018 whereas the World’s economy distracted by the trade tension between the US and China. The unexpected outbreak of the corona virus forced the demand further lower which hit the commodity prices.
IHS Markit estimated the global thermal coal demand post Covid-19 around 87 million ton lower than initially projected in the beginning of the 2020. The biggest declines are projected from China and India, the two biggest thermal coal importing countries which accounts of almost half of the World’s total import. Weak demand from China started in April 2020 after the World’s second biggest economy lifted its lockdown policy. In the first quarter of the year even after the country implemented lockdown, import was still strong. Therefore China’s coal stockpile was deemed sufficient in the 2nd quarter when its economy started to recover. Analists predicted the country’s thermal coal import in the first semester is slightly higher (or around 58%) compared to the last’s year import figure in the same period. This explain why the demand is still sluggish despite the Chinese economic indicators in the 2nd Quarter is positive. China’s economy growth is positive 3.5% in the 2nd Q, a reversal of slump of minus 6.8% in the 1st Q of 2020.
In the case of India, the decision by the Modi Administration that imposed the nationwide lockdown in March which continued until early June trigger India’s coal import to fall significantly. Although the country’s economy started the recover but the demand remains weak. This is the case in other big coal importing countries in the far east such as South Korea and Japan. While in the Southeast Asia which is regarded as the most dynamic region for coal-fired power plant development, import in the coal intensive countries such as the Philipines and Vietnam is very low. The lockdown policy in the Luzon Island imposed by Duterte Administration is the main factor of the significant decline of the coal demand in the Philipines. Together with China and India, the Philipines accounts of around 65% of Indonesian coal exports.
In respect to coal supply, coal production output is relatively strong especially from Australia and Indonesia. The Ministry of Energy and Mineral Resources announced the first semester coal production is around 275 million ton or half of the target production for 2020. Thus technically such target might be achieved as the historically output of coal is usually higher in 3rd and 4th quarter every year. However, this strong production will undoubtedly be affecting the price where the demand is predicted remains week in the remaining of the year. Despite some hopes that upcoming winter season will help coal demand to increase but most of the countries are still struggling to contain the covid-19. Therefore in this circumstance, some coal miners are considering to reduce their coal output due to weak demand. On the other hand, to defend the already tight competition in the market, some coal miners are planning to raise their production in the second semester. At this stage, the Ministry has yet to issue the proposed RKAB revision. We do hope the demand would recover very soon so the HBA will not fall below the 50 dollar level.