Citibank says coal prices will remain ‘higher for longer’

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  • Citibank has upgraded its price forecasts for thermal and coking coal over the next two years
  • It expects strong demand from southeast Asia and China, the world’s largest consumer
  • Prices are likely to be supported by a sharp decline in new mine investment in recent years

Coal prices look set to stay higher for longer.

That’s the view of Citibank’s commodity research team who expect limited growth in Chinese coal output to underpin prices for both thermal and coking coal over the next two years.

“We now expect medium-term coal prices to stay ‘higher for longer’, and raise our thermal coal price forecast for 2019 to $85 a tonne from $75 a tonne and forecast for 2020 to $80 a tonne from $65 a tonne,” Citi says.

“We also revise up our medium to long-term coking coal price forecasts, albeit more modestly, by $10 a tonne per annum to $138 a tonne for 2019 and $130 a tonne for 2020.”

Here are Citi’s new price forecasts.

Source: Citibank

Citi says its forecast upgrades are based on the assumption that China should remain a strong coal importer from the seaborne market for the rest of this decade, pointing to rising domestic coal production costs and limited prospects for large-scale supply growth due to stricter environmental and safety regulations.

“This should see seaborne coal stay competitive for much longer than previously expected,” it says, referring its thermal coal forecasts.

“We therefore anticipate tight supply and demand balances in the seaborne market associated with high price volatility, due to a lack of spare capacity to cope with major disruptions and/or demand spikes during the winter heating season.

“Further, global growth appeared stronger than earlier expected, supportive of power demand particularly in emerging market countries, including South and Southeast Asia where a wave of new coal-fired power projects are expected to come online in the next few years.”

As for the outlook for coking coal prices, Citi says prices over the medium term should be supported by a lack of spare capacity globally.

“Falling investment capex during the past decade has resulted in low spare coking coal capacity in the Chinese domestic and seaborne market,” it says.

“Therefore major disruptions could weigh heavily on the markets and create price spikes.”

Pointing to the chart below, Citi notes that capital expenditure from coal producers has fallen by around 70% in both China as well as outside of China, likely resulting in constrained seaborne supply growth going forward.

Source: Citibank

“Set against moderate demand growth in short to medium term, driven by Southeast Asia, this lack of investment in the supply side should be supportive for prices and producer margins,” it says.

“Further, the reduction in coal mining capex may leave coal prices prone to spikes on unanticipated supply disruptions.”

While Citi has upgraded its coking coal forecasts, it says prices are unlikely to enjoy as much upside because of greater availability of steel scrap in China and expectations that Chinese steel production will start to turn negative by 2020, limiting overall demand for coking coal.