As the coronavirus' economic effect draws its toll, Australian thermal coal prices have now hit their lowest level since 2016. Newcastle thermal coal's high-energy price this week dropped to US$ 50.60 a tonne, down around 25 per cent since January.
Initially, the impact of COVID-19 on energy prices was geared towards oil. The oil industry is having an early look at what a post-peak oil world driven electric vehicle could look like, with demand significantly down.
Now thermal coal used to produce electricity gets a glimpse at how its own future will unfold. COVID-19 may make 2020 a microcosm of the rising fortunes of thermal coal.
Significantly reduced global economic activity is reducing the market for thermal coal as a result of raising power production. Coal could take another hit in some markets because of record low LNG prices which may see power generation moving from coal to LNG.
However, it will be the continued uptake of cleaner and ever-cheaper renewable energy in the longer term that will reduce the demand for coal.
Despite the economic downturn, last week Abu Dhabi claimed just US$ 13.50 / megawatt hour (MWh) of a new record low solar tariff. According to Bloomberg New Energy Finance, onshore wind and solar power are already the cheapest source of new energy generation across most of the globe.
Australia's largest export markets for thermal coal show a reduced demand for coal
Even before the Covid-19's worst economic impact took hold, Japan's thermal coal imports fell 3 percent in the first quarter, according to trading statistics from the nation's finance ministry. Japan is Australia's main export destination for thermal coal.
It was also expected that South Korean thermal coal imports would drop to a low of ten years in the first quarter due to coronavirus and temporary shutdown of coal plants to reduce chronic air pollution in the country.
Inevitably, the path China’s thermal coal imports take will determine how the market develops in 2020.
With the domestic mining sector shut down during the lockdown along with everything else, China's first-quarter coal imports have been strong.
Nevertheless, with the Chinese lockdown over, if domestic supply is able to cover a higher proportion of subdued demand, it is likely that thermal coal imports can slump forward.
The Chinese government may go further and insist that to protect the domestic industry, thermal coal imports should be cut.
In India the story is a little close. Since the start of its own lockdown, India's power demand has fallen by nearly a quarter and thermal coal stockpiles are rising to record levels. This financial year may see the first decline in Indian power demand in at least 36 years.
India's total imports of coal in March, including thermal and coking coal, fell by 27 percent over the previous year due to lower demand and restrictions on lockdown. April looks like Indian coal imports will be a poor month, too.
Like China , India has its own domestic coal mining industry to protect which is increasingly capable of meeting generators' needs as power demand falls.
The Indian government has consistently expressed a desire to reduce reliance on imported thermal coal without much effect on actual volumes. The government now appears to be stepping up its efforts, however, and reduced demand could give domestic miner Coal India a chance to meet a greater share of thermal coal consumption.
For the first time, the willingness of the Indian government to reduce imports could see some progress, and the effect could reach beyond the current global economic downturn.
Coal exporters are scrambling a warning of things to come for markets
For South African exporters, which have become increasingly dependent on Indian imports, a significant decline in India's thermal coal imports would be very bad news. In 2019, 58 per cent of all coal exporters from South Africa went to India.
Most Indian thermal coal imports, however, come from Indonesia which would also be greatly affected by a decline in Chinese imports. China and India are the two main export destinations for thermal coal in Indonesia.
All the same, Australian exporters will not escape unscathed. Exporters could see decreasing demand in all four major export destinations in Australia-Japan, China, South Korea , and Taiwan. Concern about the direction the thermal coal market is heading has already seen Australian mining firms reviewing plans to expand capacity.
Therefore, if they see their own markets, such as India, declining, Australia may see increased competition from other exporting nations.
Australia has been seeing intensified competition in its main Japanese market for the first quarter of 2020. According to its Ministry of Finance, Japanese thermal coal imports from Australia are down 4 per cent. Nevertheless, imports from Indonesia are up by 14%.
As if that weren't enough, Australian coal exporters face potentially damaging revelations about testing the quality of coal. One research lab has disclosed that half of the test certificates it has completed for coal exports over the past decade have been manually altered to enhance the coal's indicated efficiency.
Thanks to the economic impacts of COVID-19, 2020 is expected to be a bad year for exporters of thermal coal. Though a bounce back in 2021 can be expected, export levels may never recover fully.
Rising renewable competition as well as increasing concerns about air pollution and carbon emissions, and the accelerating withdrawal of global financial majors from financing new innovations in coal power are all taking its toll.
In the longer term, as the energy transition to renewables progresses, thermal coal exporters will face a drastic decline in demand.
Meanwhile, 2020 could provide us with a good indication of how that will work for the coal industry.
