Commodities 2021: Atlantic thermal coal market looks to evolve in 2021

S&P Global Platts, 21 December, 2020

The Atlantic thermal coal market looks to continue evolving in 2021 as declining demand in Northwest Europe gives way to growing demand in the Mediterranean region, and broader supply and demand dynamics continue to reel from a tumultuous COVID-19-impacted year, while Asian markets look set to play a major role.
Atlantic coal oversupply is predicted to fall to under 5 million mt, according to S&P Global Platts Analytics, amid several supply-side cutbacks in 2020. This reduction is also the result of several key exporters focusing more on trade flows to Asia, which could likely have an impact on the more traditional trade routes and arbitrages during the first half of 2021.

In Europe, coal-fired power generation could regain some competitiveness against natural gas during the first few months of the year, Platts Analytics expects, which could see coal generation consistently rise on a year-ago basis for the first time in several years.

A recovery in gas prices has meant that despite similar strength in coal and carbon pricing, some of the more efficient coal plants in Northwest Europe could see the rampant coal-to-gas switching of the last two years be more subdued, giving a boost to physical coal demand.

Regarding physical coal demand in Europe, a reduction in US supply is expected to be seen in the first few months of the year as prices are unlikely to break to the levels required to pull in additional US tons, and sources expect the market to be mostly filled by Russian coal exported via the Baltic, as well as some returning Colombian supply.

Black Sea coal competes for Med region

In the Mediterranean region, the largest importer Turkey in expected to be at the forefront of potential new trade flows, as growing supply of Russian coal exported via the Black Sea region – particularly the Taman Sea port – could see Russian coal displace Colombia as the preferred choice of Turkish utilities.

Market sources expect to see more of this Black Sea coal in the market in the first few months of the year, particularly due to uncompetitive petcoke pricing and ongoing supply issues in Colombia; however, a recovery in Colombian supply later in the year could also push this Black Sea coal further afield.

This is broadly in line with market expectations for Russian coal exports, as the country aims to move more coal through its Asia Pacific export hubs – which are expected to be near full capacity – and the Black Sea export hubs in order to fill pockets of demand in the Med and even the Middle East, while opportunistic trade flows to South Asia are also expected.

This is due to the overall decline in European demand, which had been a key outlet for Russian exports via its numerous Northwest Baltic export hubs.

Colombian coal supply is expected to recover during 2021 after being cut severely during 2020. The Cerrejon mining complex is due to be exporting more regular volumes from the start of the year, which is expected to mostly fulfill previous obligations.

Expectations for the Prodeco operation are mixed, however, as mine owner Glencore’s request to keep production idled was yet to be resolved at the time of writing.

Should production at Prodeco remain idled, sources expect a continuation of the trend seen in 2020 whereby larger exporters look to purchase stockpiles from the country’s smaller producers in order to keep some export volume moving, adding further tightness to the market.

“High CIF ARA prices could incentivize US and Colombian coal exports to Europe, but in our opinion, would need to be at a sustained high level for an extended period to encourage this trade flow,” said Matthew Boyle, an analyst with Platts Analytics.

Chinese demand for South African coal

Regarding South African coal exports, sources said the market in 2021 would rather unsurprisingly be greatly dependent on the economic situation in India, as well as ongoing demand growth from Pakistan’s thermal and cement sectors.

However, this trade dynamic could be skewed potentially by renewed interest from buyers in China, a development which began in late 2020.

Typically China does not import South African coal due to issues with trace elements; however, with LNG prices in Asia surging well above coal on an adjusted $/MMBtu basis, sources said there could be a wider move to waive these restrictions on trace elements and import cheaper South African coal, which could be a seismic shift in the South African market.

This highlights the key factors outside of the Atlantic Basin that may ultimately set the tone for 2021, such as the much larger import markets of India and China, ongoing geopolitical issues surrounding import policy and the overall move to reduce carbon emissions, sources said.

By Sarah Matthews, Joseph Clarke, Fred Wang