South African coal industry faces up to 14-year low prices

Author Alex Thackrah, Deputy Editor, Coal Daily International

After trading at nearly $100/t over the winter, South African high calorific value (CV) coal prices fell to a 14-year low this week amid subdued demand caused by the Covid-19 pandemic.

This price plunge threatens producers’ margins but could also cause a shift in trade flows as opportunistic buyers take advantage of competitive prices.

On 20 April, Argus'; NAR 6,000 kcal/kg fob Richards Bay (RB) prompt assessment sank to $46.75/t, its lowest level since January 2006, and a fall of $30.37/t since 1 March.

Argus’ fob Richards Bay NAR 6,000 kcal/kg, $/t

Argus’ fob Richards bay NAR 6,000 kcal/kg

Source: Argus

A collapse in demand from India – which took 57.7pc of the Richards Bay Coal Terminal’s (RBCT) 72.2mn t exports in 2019 – is the key driver behind the low prices.

The low RB prices will squeeze producers’ margins, with one mining firm saying current prices are not sustainable and that mines will be “underwater.”

At fob prices of $45-50/t and an exchange rate of 18.50-19.00 South African rand to the US dollar, some producers’ margins are OK for high-CV coal, according to a trader. But he added that most sellers of lower-CV off-specification coal – which fetch lower prices but incur similar production costs to higher-CV products – would be facing a difficult situation.

fob RB prices vs select unit costs, $/t

fob RB prices vs select unit costs

Source: Argus, company reports

Some smaller miners have already been forced to reduce exports and increase supplies to the domestic market, according to a second trader. Returns in the domestic market tend to be lower than for export, with utility Eskom procuring a large chunk of its low-CV supply on long-term contracts. Average realised domestic sales prices for some of South Africa’s large miners are around $14-24/t, according to Argus calculations.

Unit costs on a fob basis will vary considerably depending on the individual firm and mine. But some of the larger miners’ average costs are likely to be around $30-45/t, Argus estimates. By way of comparison, Argus assessed the weekly fob RB NAR 5,500 kcal/kg and NAR 4,800 kcal/kg off-specification prompt markets at $38.44/t and $31.49/t, respectively, on 17 April.

Diversification opportunity

The recent price fall has seen RB prices converge with other global markers (see chart) and, coupled with low freight rates, could allow suppliers to diversify sales while South Asian demand is subdued.

30 day global fob prices, $/t

30 day global fob prices

Source: Argus

After trading at a significant premium over the winter due to high demand from the Indian sponge iron sector and supply tightness in India and South Africa, the Argus fob RB NAR 6,000 kcal/kg assessment was at a discount to comparable Australian, Indonesian and Russian fob prices on 17 April. It held only a slight premium to Colombian supply, against which South African coal has a significant freight advantage into south and east Asian markets.

South African coal is now more competitive on a delivered basis in many destination markets. This could see suppliers regain market share in some regions, but reduced demand from India could still weigh on overall exports in the near term.

Indian thermal coal imports could drop by 15mn t on the year to 170mn t in 2020, while South African exports could decline by 5mn t to 71mn t, according to the latest Argus Seaborne Coal Outlook.

Annual change in RBCT March exports, t

Annual change in RBCT March exports

Source: port data

RBCT exports fell by 14pc on the year to 5.8mn t in March, as loadings for India dropped by more than 1mn t and the terminal briefly shut down at the end of the month.

South Korean buyers have already returned to the South African market, booking at least two cargoes of high-CV RB coal in the past week, at prices at or below $49/t fob.

Zero South African coal was shipped to South Korea in the first quarter of 2020, port data show. The last delivery was 155,583t in December 2019, while annual exports nearly halved on the year to 3.9mn t in 2019.

In South Korea, Argus estimates the theoretical generation cost for a 38pc-efficient coal-fired plant burning South African coal at $39.75/MWh, based on fob RB prices and April freight rates, and including South Korean consumption taxes. This is nearly $2/MWh less than the equivalent cost for plants burning high-calorific value Australian and Russian coal, reversing the respective $4.60/MWh and $7/MWh average premiums that South African coal held in November-February.

South Korean generation costs, $/MWh

South Korean generation costs

Source: Argus

Low freight rates smooth changing trade patterns

Dry bulk freight rates from Richards Bay to key markets have also fallen sharply in recent weeks amid subdued demand for goods, falling bunker fuel prices caused by lower oil prices, and a seasonal slowdown following the Christmas period.

Rates on the Richards Bay-Krishnapatnam route were $5.85/t this week, down from around $10/t in January and a high of $14.95/t in July last year.

This has mirrored the trend seen on routes from the Americas to Asia, and low freight rates are one reason why coal supply from Colombia and the US made inroads into the south and east Asian markets at the end of the first quarter.

While low freight rates allowed this Atlantic to Pacific basin arbitrage window to open, high RB prices during the first quarter — the Argus fob RB NAR 6,000 kcal/kg assessment averaged $78.40/t in 1Q20 — prevented South African supply from competing in certain markets.

In any event, Covid-19 presents significant challenges for the South African coal sector. Ironically, the easing of coronavirus-related restrictions governing coal production in South Africa comes when the market is already oversupplied. Coal stocks at the RBCT terminal are 5.1mn t, up from 3.5mn t at the start of April.

Seaborne thermal coal supply forecast, mn t

Seaborne thermal coal supply forecast

Source: Argus Seaborne Coal Outlook

The extent to which Indian industrial demand recovers following its nationwide lockdown is likely to be the crucial factor driving RB prices in the near term.

Learn more

For the API4 daily price – see Argus/McCloskey's Coal Price Index Service

For price assessments (including Argus fob Richards Bay NAR 6,000kcal and off-specification prices and differentials for NAR 5,700, 5,500 and 4,800 kcal) plus latest news and detailed analysis – see Argus Coal Daily International

For Argus Consulting price forecasts and global market outlooks for thermal and metallurgical coal – see Argus Seaborne Coal Outlook

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