The coal price rally is expected to be derailed over the next two years amid expectations that China and India, the world’s two biggest consumers of the energy source, were likely to address domestic issues that have facilitated the strength in prices.
Afriforesight chief energy economist Charles Kieck said South Africa’s coal producers were sitting pretty, having enjoyed high coal prices last year, although the recent strengthening of the rand has spoiled the party a little.
“We see coal prices coming down a bit, which is not good. The performance of South Africa’s coal producers also depends on what is going to happen to the rand on the other side of revenue. We see the rand weakening, as some of the Cyril Ramaphosa hype fades, which is good for producers,” said Kieck.
The rand has strengthened on the outcome of the ANC’s elective conference in late December, from R13.53 to the US dollar to below R12 to the dollar as financial markets favour Ramaphosa as president of the ANC and South Africa.
Kieck said in the 11 months to November South Africa had exported 72.9million tons of coal, compared with 74mt for the full year to the end of December 2016.
“In India, there is a preference for South African type of coal, which is of relatively high quality. All new power stations coming online in India are designed to use this higher-quality coal, and South Africa is expected to steal market share from Indonesia because of the high quality of coal.”
In both India and China, there is a drive to move away from coal, with Beijing moving away from coal to battle pollution, and India moving away from imports to boost its local industry.
Kieck said over next two years there would be a downward trend for coal prices as issues in both China and India fade. “Exports to India are a big influence on South African coal. India is trying to wean itself from importing coal and is encouraging local production,” Kieck said.
But the large state producer, Coal of India (about 80percent of Indian production), was notoriously bad at reaching its production targets – so this import window would remain open for a while.
Kieck said that South African coal producers had benefited from critically low stocks at many Indian power stations.