India slowdown threatens S African coal price outlook

A prolonged slump in Indian coal demand threatens a recent recovery in South African prices. And if suppliers are to diversify exports to non-Indian markets in a similar vein to the second quarter of 2020, they may need to rely more heavily on the Chinese market.

A rising number of Covid-19 cases in India has raised fresh concerns about coal demand in South Africa's largest export market. Localised lockdowns in India are denting industrial activity and weighing on power consumption.

It is difficult to predict the extent to which Indian economic activity will contract in the weeks and months ahead, and the government will be anxious to avoid a repeat of the economic slump witnessed in the second quarter of 2020.

But cement dispatches this month are down by around 30pc compared with March, casting doubt over projections that infrastructure and housing projects will drive 15-17pc year-on-year growth in India's cement demand this year.

And while India's steel sector remains largely insulated from the country's oxygen supply squeeze, the sponge iron sector — a key consumer of high-grade South African coal — has raised concerns that a lack of oxygen supply could negatively affect operations.

Capacity utilisation at some sponge iron units in central Chhattisgarh state declined to 65-70pc last week, from 100pc two weeks ago.

Sponge iron sector key

Any demand slump from the sponge iron industry will weigh heavily on South African coal imports, given buyers typically favour Richards Bay coal over other origins owing to its high fixed carbon content. South African coal exports to India declined by 4.8mn t, or 11.5pc, on the year to 36.8mn t in 2020. This is a similar rate of decline to the 10pc fall in India's sponge iron production to 33.1mn t, according to World Steel Association and Indian steel ministry figures.

South African coal is also consumed by India's cement and power sectors, but the competition with other origins to these arenas is fiercer, especially with Australian coal shut out of China. High hydro levels and favourable forecasts for monsoon rains could further limit power-sector coal demand in the short term.

During the slump in Indian demand when the first wave of Covid hit in the second quarter of last year, Richards Bay NAR 6,000 kcal/kg prompt coal prices dropped to a 14-year low of $41.88/t, squeezing margins for producers, and leading suppliers to divert cargoes to unusual destinations, with large amounts being despatched to Vietnam.

This time around, API 4 prices have begun to ease from their winter highs of around $100/t, and the API 4 paper curve has shifted from steep backwardation to a flatter structure, with settlements along the curve in the range of $81.65-87.30/t at the close on 27 April.

A supply-side response, both in South Africa and globally, amid low prices during 2020 should prevent a repeat of $40-45/t API 4 prices this time around.

But South African exporters may still need to diversify into different markets to compensate for any lost Indian demand.

Alternative export routes

Exports from Richards Bay to Vietnam jumped fourfold, or by 5mn t on the year, to 6.2mn t in 2020, with buyers capitalising on low prices during the second quarter to build up stocks.

And although the longer-term outlook for Vietnamese coal demand remains robust owing to strong economic growth projections and anticipated coal-fired capacity additions, the shorter-term outlook is less favourable. Strong hydro generation is likely to cap power-sector coal demand this summer, while the Australia-China trade dispute has increased competition from Australian coal to the southeast Asian market.

Turkey was another destination that ramped up South African coal purchases last year, taking 1.7mn t, up from 232,000t in 2019. But competitive Russian prices following the ramp-up of shipments from the Black Sea port of Taman, as well as anticipated higher production from Colombia in 2021, should trim South African market share for the rest of this year.

China appears the most likely option to take any flexible South African supply, despite buyers last week balking at offers of above $100/t cfr South China for Richards Bay NAR 5,500 kcal/kg coal. South Africa exported 1.9mn t to China in the first three months of this year, up from zero in the first quarter of 2020. Shipping data show just one vessel has departed RBCT for China in April, but if high domestic prices in China persist, then more South African coal should flow along this trade route as long as suppliers are able to meet the necessary fluorine requirements.

The UAE should also take more South African coal this year, as operations at the Hassyan power plant increase.

But API 4 prices and prices for off-specification grades of South African coal appear likely to come under some pressure as long as the India slowdown persists, barring any short-term supply disruption such as yesterday's train derailment.

By Alex Thackrah

Year on year change in RBCT exports mn t

Fob RB prices vs RBCT exports to India, mn t $/t