Import bans, strikes and La Nina

China’s ban on Australian coal imports, strikes in Colombia as well as potential weather disruptions from the La Nina effect have had a major impact on global coal prices. 

This week’s pod discusses the outlook for coal in Europe and Asia amid the green energy transition, and the role played by Russia, a key exporter to both regions. 

Host: 

• Richard Sverrisson, Editor-in-Chief Europe, Montel, 

Guests: 

• Diana Bacila, Senior Analyst, Alpiq, 
• Laurence Walker, Coal and Gas Editor, Montel. 

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

News drives markets, and every day Montel's experience reporters are on top of the stories that shape European market developments. Can you afford to miss out? Go to monte news.com for the latest price driving stories and a free trial.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:31

Hello listeners and welcome to the Montel Weekly podcast, bring Energy Matters in informal Setting. Today we'll talk about the global coal market and hope to address some of the concerns highlighted by several of you listeners out there. Is coal anachronistic a relic of the age of combustion or a necessary fuel to ensure the lights stay on in many parts of Europe in the coming years? Joining me to talk about current market dynamics and the medium to long-term prospects of coal are Diana Bacila, senior Analyst at Alpic and Montel Cole and Gas editor Laurence Walker, a warm welcome to you both.

Diana Bacila, Senior Analyst, Alpiq: 1:10

Thank you very much. Richard, happy to be here talking to you as well.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:13

Always good to have you on board. Diana, I'd like to just kick off the discussion before I pass over the bat on to Laurie. It's been a bad year for Cole in Europe this year. Have we turned the corner, Deanna?

Diana Bacila, Senior Analyst, Alpiq: 1:25

It has been a bad year because of the switch from coal to gas that we have witnessed starting even from last year. That was the beginning of the whole structural change that we are witnessing. But if we, if you're looking at the prices in Europe, I wouldn't say that they're extremely bad. Of course, we were expecting this structural decline in prices and for them to, to near more cash costs of production. That's just because of the cycle determines to to happen. However, we had many different events that have driven or. Made a lot of volatility for coal prices in 2020 and probably if I have to take a stand on it, we'll continue doing so in the years to come.

Laurence Walker, Coal and Gas Editor, Montel: 2:10

Okay? Yes, Diana, I wanted to ask a little bit more about the prices actually as well. Obviously, we saw, I know lows of below 40, even on spot prices earlier this year, front month prices. Do you see us returning to such levels? At some point in the near term, or do you think, as we should mention we're past this now and we have enough, a bit more momentum, a bit more balance in the market?

Diana Bacila, Senior Analyst, Alpiq: 2:32

I guess it'll depend on the outlook we are talking about. Are we talking the short term? Are we talking this winter? Are we talking longer term, what

Laurence Walker, Coal and Gas Editor, Montel: 2:39

if we're looking at next year, perhaps

Diana Bacila, Senior Analyst, Alpiq: 2:41

next year? First of all we have to pass the winter. And why I'm saying this is because we have many drivers in the short term, which have been on the table, let's say in the coal market. So first of all, the main reason why prices have reached this 38, as you mentioned, the level in Europe. Have been connected with the lockdowns that we have witnessed with the fact that demand has disappeared. Trade has contracted actually as a result of lower demand so far in 2020. Major demand centers have reduced their calling ports, the same time major suppliers had to react to that. And on the other hand, the emerging economies. For example, if I'm thinking about Vietnam, Pakistan, Bangladesh, they all have managed to restock a little bit more, taking advantage of the low price environment. And this has happened in, in, in the beginning of the years, I've mentioned as a connection as well to the huge plunge that we have seen in oil prices as well. And as I mentioned the whole reduction or contraction in demand. The reason why. Let's say later on we have seen a rebound was mostly connected, as you are aware as well, of on the strike. The long lasting, let's say strike that we have in Columbia now. This has happened since August. And apparently it's still lasting. They're not able to find an agreement. It's now around 70 days, so we have lost that supply. At the same time, we had a rail disruption in Russia, which did not allow the Atlantic balance, let's say to find more coal. So that's why prices have picked up a little bit lately. But now that the latest month we had another surprise from the Chinese government this time, which due to the political tensions between China and Australia have imposed a ban on Australian coal. And that has made a turn in the market. And now we are back to, let's say, close to 50 level. But even this level, because Richard has asked, are we witnessing a very low time for coal? Yes we are. But still the major producers, the more competitive ones are still. Relatively fine in, in terms of the margins.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:44

And Diana, it's very interesting to see what's happening in America now. What do you think a Biden presidency will mean for the coal market? What's the impact on the consequences of Biden in the White House?

Diana Bacila, Senior Analyst, Alpiq: 4:55

That has been a very interesting topic, especially since Biden presidency. Apparently seen by China or Biden as a president is seen as a more favorable person to deal with than Trump. So this could help ease the tensions between US and China when it comes to the trade war that we have with witnessed in the previous years. And at the same time, what could happen is the fact that a change in the US presidency could even help deescalate the current tensions between China and Australia. Australia is an alley of the US as well. So that could have an implication of change in this import ban for next year. And in the long term, why not even improve total energy exports out of the US into China?

Laurence Walker, Coal and Gas Editor, Montel: 5:39

Can I ask regarding Russia? Actually you touched a little on Russia exports. They appear to have been a bit, little bit of a savior, at least with the shortfall in Colombian coal in recent months. But we're seeing data now showing that there's more coal. From Russia going to Asia, then to Europe in the first half of the year. But at the same time, Russia has been ramping up its capacity in the West. So we've seen increased capacity at US Luga. They've got this new port of Taman, which they're saying they're gonna expand from say, 3 million tons, three. Capacity at present of 4 million tons. What is their game plan, do you think, and why This increasing capacity, at least in, in the European side of things?

Diana Bacila, Senior Analyst, Alpiq: 6:18

I think the main let's say demand region in the Atlantic as Europe is starting to dry up, is Turkey. So if Russia is increasing its capacity in the west is mostly to feed up the Turkish market. Could be also some North African countries as well that are increasing or, slightly, let's say most of them have already changed the plans of investments from coal to something else, but still. There are still some plans online for increase in coal power capacity, which means that the supply that will increase, let's say from Russia based on the increase in infrastructure capacity, will feed this markets as well. This could come as a fact that US coal has been shrinking heavily. So the exports from out of the us have declined due to the fact that US is a very high cost supplier. Of course, market forces have made this happen. And also if we look at Columbia, plans from Columbia to expand capacity, have dried up as well with Glencore putting on on hold its operation due to the low price environment, let's say. So this leaves room for Russia to step in,

Laurence Walker, Coal and Gas Editor, Montel: 7:23

assuming we're not gonna see much more coming over from Sarah Ho, for example, before the end of the year. How reliant is Europe on Russia this winter, and are they likely to exploit this ask? Particularly higher prices over the winter period.

Diana Bacila, Senior Analyst, Alpiq: 7:37

One thing that is important, now as you mentioned, is out with the production at the same time due to the LA presence in the Atlantic Columbia risks having heavy rains in the central part of the country where Drummond is also producing. So you don't risk only losing this home supply but also could end up losing Ru. So yes, as a result, Russia will step into, let's say, balance this demand. The question remains, how will the Chinese government do between, at the moment, as we know they impose a ban on Australian coal, meaning that market players in China are running after other types of supply, like Russia, South Africa, to replace that coal. So the question will be, will Russian coal. See better margins in the east. Therefore, their, the prices to Europe will, as a result, have to be higher as well because of the competition between Pacific and Atlantic. Or will we see better relationships between China and Australia, which. As a result will not necessarily have to leave Russian buyers with the, let's say, a potential up plain prices. Therefore, they would just have to be dependent on what European demand will be willing to pay up for.

Laurence Walker, Coal and Gas Editor, Montel: 8:51

Related to that is the, obviously the very high Richards Bay prices south African coal prices we've seen recently as well, and we're hearing perhaps, obviously more opportunity now for any Colombian supply that does come. To go to Asia instead in, in, maybe in place of some of the South African. Is this an added concern for Europe over the winter period?

Diana Bacila, Senior Analyst, Alpiq: 9:11

Exactly. This this is one, one thing I have read as well, reports that four capes of from Columbia and also from Riches Bay, were heading into China. So definitely there is, let's say an upside risk as more Atlantic supply find its way into the Pacific. But this could have been just an opportunity, let's say in the short term, just because we didn't have a strong demand from other players. If I'm thinking about the outlook for the winter, I'm going back again to La Nina as LA Nina risks to bring colder weather in Northeast Asia as well. So this could actually, based on weather. This could end up tightening the global market as well, but it remains to be seen because that Australian call that is not going to China, we'll have to find some buyers as well. So in the end, it remains to see how the balance will be met between the import restrictions, the demand, the from the change in the shipments, let's say from Atlantic to Pacific, and as well how the tensions will be changing going forward. And how much supply will miners globally be able to come up with?

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:17

I think Daniel, you made it very clear that, a lot depends on the weather here and the weather in Northeast Asia. What is it looking like at the moment? You mentioned the Nia effect, which could then drive a cold spell in that part of the world, but. What are the prospects at the moment? Would you say it's 50 50 a cold spell, or is it higher likelihood than that?

Diana Bacila, Senior Analyst, Alpiq: 10:38

There is a higher likelihood for laia to be a strong event. At least that's the latest reports that we have from the major meteorological agencies. So the country's most affected are Japan and the Northeast China. So far we haven't seen a very cold spell, but winter is still to, to begin, let's say. The risk is there, but the players have prepared for this. If we look at the JM price the LNG prices in Asia, we have seen increased prices there as well. And that was the result of the retalking that that major players are doing at the moment. But another problem with Laina with, or let's say another risk. Would come from the fact that it brings increased precipitation in Australia, Indonesia, and even South Africa. And related to low risk questions about the API four jumping so much. Apparently some rains were seen even there that led to some sort of tightening of the supply in the market. And there are some risks of strikes there. So there, let's say there is a mix of drivers which points somehow to some sort of a. But at the same time, as I mentioned, and I repeat this point, the Chinese import ban is one that is. Partly offsetting, or even more than that, the current upside risks.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:48

And then of course thena, you have the additional driver of COVID-19. This global pandemic that shows very little sign of abating at the moment. But what are the prospects here? Maybe you could tell us a little bit about how. The producing countries have been impacted by the coronavirus and how that could, what are the prospects next year? If you see the weather impacts in South Africa, Indonesia, Australia, you could also maybe potentially have an impact from from COVID Ovid 19.

Diana Bacila, Senior Analyst, Alpiq: 12:12

So far, the impact from COVID has been reported to bring delays when it comes to investments. Also due to the fact that travel has been restricted as well. So that has not helped at all. The mining industry. And some recent reports were coming out of Indonesia, for example, because Indonesia had some plans of new investment in 2020, which have not been met. Apparently only around 37% of the initial target for the coal mining industry has been met so far. And most of the miners in the global market seem to have been focusing more on efficiency, cost cutting measures instead of investing infra infrastructure and heavy equipment. So that has been the result of the virus so far in terms of trade. All the major countries have have reduced their exports as a result of the demand narrowing as well. However, South Africa and Australia have been. The two, let's say suppliers, which haven't seen a strong reduction because of the take or contract ports. Driver that prevented a strong decline in their exports.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:21

And how about on the demand side? We've seen a sort of a big drop in gas and power demand in Europe, at least in the first wave of the pandemic. But what's happened to coal demand if we in Europe,

Diana Bacila, Senior Analyst, Alpiq: 13:31

in coal power generations or coal burning? In Europe, so far we have seen a 30 per, a 34% drop. In 2020, that's a combined effect of all the drivers coming from gas, hydro demand, renewables, everything. And in terms of imports, Europe has also been one of the regions from the major importers in the world that reduce demand the most. So 30 to 40% drop in import demand in Europe has been definitely a big impact on Columbia, even Russia, US as well, which are the main suppliers to, to the continent.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:09

And if I can bring the discussion a bit more into the, maybe the medium and long-term outlook. Do you think is coal in Europe ever likely to come back and compete with gas and under what circumstances?

Diana Bacila, Senior Analyst, Alpiq: 14:21

That's a tough question. And why am I saying that? It's because of course we are all aware of the fact that we are shifting the focus away from coal. And if we look on the plans of each countries from Italy, Spain, Germany, France, everyone is trying to, or. Let's say already have in place targets to, to decommission coal power capacity. So definitely a revival in terms of demand is not likely to be seen. However, what could happen. Is that in times of, let's say, weak output from renewables, and I'm thinking mostly about Q1, Q4 periods during the winter time, then you could see let's say a need to bring up coal in order to balance demand. But structurally, I think if we are to think about long-term coal demand prospect in Europe. Definitely we are not gonna see a strong rebound in that.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:16

You've seen that in the UK from the start of November, saw quite a lot of coal burn, but what other countries UK is gonna phase it out by 2025 anyway, but where are the other strongholds that they're gonna keep this coal demand going? With Poland, Eastern Europe, Germany. Are these the markets for coal in the future?

Diana Bacila, Senior Analyst, Alpiq: 15:35

So far we have Germany, Poland, of course, but even Poland has set up some targets to come up with the decommissioning plan for coal power capacity. So apart from Germany, we have Italy and Spain. So these three markets, I would say, are the most relevant so far. And that could still keep the market, let's say, interesting, at least for the next 2, 3, 5 years max. But all the rest are shifting away and more into gas.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:58

So when do you see this? Demise of coal fired power generation actually happening.

Diana Bacila, Senior Analyst, Alpiq: 16:04

I think big shifts are gonna be seen starting from 2023, 2025. That will be the time that will bring a change, let's say, as we will lose, we'll close down more coal power capacity based on the current plans that countries have at the moment.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:19

Is this based on. Market dynamics or policy? Or a bit of both, do you think? Diana?

Diana Bacila, Senior Analyst, Alpiq: 16:25

I think both are doing a good job, let's say. If we look back at 2019, gas has done its role. Into doing this natural shift from coal to gas. CO2 will work as well as a driver in the future. The price of CO2 will remain highly important. And the, as we know, it's more likely to be higher than lower, at least not to discuss the level. All in all, I think policy and market forces are both working together in coming up with reduction in coal power capacity.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:53

And then the talk in Brussels is about the green deal and the green recovery to, to spur this shift to clean energy. But I'm just wondering in, in the midst of this coronavirus pandemic, is it that likely to accelerate the end of coal or is it, will it slow it down as. As people seek to, have a cheaper way to keep the lights on when they have to prioritize boosting the economy in other areas.

Diana Bacila, Senior Analyst, Alpiq: 17:16

It depends on the countries we are considering. If you look at what has happened in the past months, even China has pledged carbon neutral aim by 2060. Apparently the whole market is is moving slowly into that. I'm not sure if that was necessarily Corona, but for sure they're jumping on this wagon of reducing emissions. And at the same time, I see that more of the emerging countries in Southeast Asia as well are dropping their plans on investing in coal power and moving towards more renewables. So in a way, yes, Corona just because it has reduced energy demand and industrial demand and maybe even pushed for for countries to, to revise their investments. And we know that renewables are a little bit cheaper than all the rest at the moment. So that could have had an impact as well. But at the same time. The whole pledge to, to reduce carbon emissions in the future is taking a toll as well.

Laurence Walker, Coal and Gas Editor, Montel: 18:07

When you're talking about the Atlantic Basin, the broader Atlantic Basin demand you mentioned earlier about Turkey. Do you see, or to what extent do you see Turkey, north Africa, middle East offsetting some of the decline in this, at least in the basin elsewhere in, in Europe?

Diana Bacila, Senior Analyst, Alpiq: 18:24

I don't think they will have the power to offset the drop in demand that we'll have that we see in Europe now for sure. Overall, the demand in the Atlantic Basin will just shrink by default. And the most important question still remains what will happen with demand in the Pacific Basin because that is what will will drive the prices. It has been doing so for a while. And that is what will drive the prices as well in the future. Because as I've mentioned, Russia has this opportunity to ship either to the west or to the east. So the price in Russia. Will be driven by where demand sits. If Pacific demand is higher, then for sure that will help Russian prices to move away from cash costs. If Pacific demand dries up, then Russian miners will not have the power to ask for too high prices for their coal.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:08

It's fascinating. You've described all the different drivers that will keep you very occupied in the coming year and beyond. But if you're talking about a demise of coal from 2023 to 2025, where does that leave you as a senior coal analyst? What does that mean for you professionally, Deanna?

Diana Bacila, Senior Analyst, Alpiq: 19:28

It'll just mean that I have to focus more and more on China, India, and all the rest of the world,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:33

and,

Diana Bacila, Senior Analyst, Alpiq: 19:33

Probably will get more interest into other fuels. For example, gas and LNG would be something very interesting to, to look out for. And probably working to replace coal even in the Asian regions.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:44

Excellent. The best of luck with that, Diana. And thank you very much for joining the Monte Weekly podcast this week. It's always a pleasure to have you here and you as well, Lori, so thank you. Thank you as well.

Diana Bacila, Senior Analyst, Alpiq: 19:53

Thank you very much Richard and Lawrence as well. And I wish you a very good end of the week.

Laurence Walker, Coal and Gas Editor, Montel: 19:58

Thank you, Diana and Richard.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:04

So listeners, that's about all from the Monte Weekly podcast this week. Thank you both to Lawrence again and to Diana. Remember, you can now follow the podcast on our own Twitter accounts, the Monte Weekly podcast. Please direct any message, suggestions or questions or. Ideas for potential guests by email to podcast@montelnews.com. Lastly, remember to keep up to date with all that's happening in the energy markets, coal, electricity, power, carbon on Montel News. You can subscribe on Apple Podcasts, Spotify, or wherever you get your podcast from, and please leave a review if you can. Thank you and goodbye.