WoodMac assesses Australian high CV thermal coal prices

The benchmark Newcastle high energy thermal coal price has fallen from US$100/t at the turn of the new year to US$88/t. Thermal coal has been hit in early February due to seasonality of purchasing in the lead up to Chinese New Year and customs delays impacting Australian vessels into China. Will this move be another short-term blip and mirror the volatility seen last year, or is a broader correction at play? Wood Mackenzie Principal Analyst Viktor Tanevski shares his views. Australian high CV thermal coal supply to remain tightIn 2019, demand growth in the Asia-Pacific market will require an extra 3 million t of bituminous thermal coal. By 2023, Wood Mackenzie anticipates a further 34 million tpy of bituminous coal demand in the region, led by India, Vietnam, South Korea, Pakistan and Malaysia.While demand is increasing, Australian high CV thermal coal supply fell last year and will only partially recover this year. The recovery might be further constrained should producers target more semi-soft sales.The ramp up of MACH Energy's Mt Pleasant coal mine in New South Wales caters for nearly all the change, with high CV supply (ex. Mt Pleasant) essentially flat over 2019-21.High CV supply could retreat again in 2022 due to lower output at Glencore's Mt Owen mine and a possible closure at Liddell. Coal quality at BHP's Mt Arthur mine is also expected to gradually decline. By 2023, Wood Mackenzie sees a growing likelihood of a return to 2018 production levels.Mine performance and quality issues limit supply responseThe fall in Australian high CV thermal coal supply helped prices move nearly US$20/t higher in 2018. Widening price spreads between high CV and high ash thermal coal begged questions as to why Wood Mackenzie was not seeing a supply response? Part of that answer rests on specific constraints at a few large thermal coal mines in Australia, which contrary to expectations of growth, actually recorded declines in output. Some mines had short-term sequencing changes, while others battled with falling product quality. Pricing differentials between high CV thermal and semi-soft also played a part, with lower semi-soft supply offsetting the fall in high CV supply.Two of the largest mines in New South Wales, BHP's Mt Arthur and Yancoal/Glencore's HVO, both reported declines in output in 2018 of 4% and 11% respectively. In Mt Arthur's case, saleable output was constrained by a lower washing yield, declining coal quality and adverse weather. At HVO, mine plans had been remodelled following a strategic review of operations following the takeover from Rio Tinto. Meanwhile, output at Whitehaven's underground Narrabri mine fell nearly 30% as it worked around a geological fault. Wood Mackenzie also understands a number of Glencore's mines were technically constrained in their ability to increase higher CV volumes by washing capacity.Wood Mackenzie&rsquo;s expectations for near-term thermal coal supply growth have moderated given recent M&amp;A and an increasing focus on capital allocation. The latest plan at HVO is to gradually recover to 15 million tpy with a focus on efficiency and productivity improvement, rather than further growth to 17 million tpy. At Mt Arthur, we expect production to peak at a lower rate of 21 million tpy, down from 22.5 million tpy, given updated capital plans and optimisation of the operation.On a price standpoint, Wood Mackenzie expects prices to recover and average US$98/t this year, down from US$107/t last year. Prices will remain elevated in 2019 given fundamental support for high energy thermal coal indexed to the GlobalCoal 6000 kcal specification (14% maximum ash ar; 5850 kcal/kg minimum nar).

WoodMac assesses Australian high CV thermal coal prices

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