LONDON/SINGAPORE (Reuters) - Asian thermal coal demand is defying its typical seasonal slowdown as well as the expanding use of renewables and natural gas, with prices holding not far off $100 a tonne despite the onset of the usual lull at this time of year.
Benchmark Australian thermal coal prices GCLNWCPFBMc1 are at $93.40 a tonne, their highest seasonal level in five years and $15 per tonne above the five-year average price.
Coal's strength is also visible in the derivatives market, where API2 2018 coal futures TRAPI2Yc1 are at around $83 a tonne, around 25 percent higher than in April 2017.
The firm prices are due to robust use in India, Japan, South Korea and even China, where coal consumption has held up despite huge programmes to boost the use of gas and renewable energy.
“Coal demand for the coming two years is expected to remain stable around current levels. Although headlines in the newspapers may suggest that coal demand will peak soon, in reality, demand will remain solid in the coming years,” said Hans van Cleef, senior energy economist at ABN Amro.
GRAPHIC: Seasonal Newcastle coal prices: reut.rs/2Jtp1Po
Thermal coal remains the most-used fuel for power generation globally, especially in Asia which uses more than 70 percent of the world’s thermal coal, up from under 50 percent in 2000, according to BP’s latest Statistical Review of the World.
The strong demand comes despite coal’s image as a dirty fuel which has left it increasingly shunned by many investors.
However, cashing in on strong demand have been specialist thermal coal miners like Australia's Whitehaven Coal WHC.AX, Indonesia's Adaro Energy ADRO.JK and Glencore GLEN.L, who have been outperforming their peers from the natural gas market like Santos STO.AX or Woodside WPL.AX.
"Thermal coal is probably one of the most hated asset classes globally but if you look at demand, it's roughly flat while under-investment is leading to lower supply," said Per Lekander, portfolio manager at investment management firm Landsdowne Partners, which owns shares of U.S. coal miner Peabody BTU.N and global commodity trader and miner Glencore.
For the rest of the year, analysts expect prices to remain strong, with a slowdown in demand only starting to weigh on prices from the 2020s as renewables and natural gas gradually eat into coal’s use.
Yet-to-be-finalised negotiations between Australian miners and Japanese utilities, who set annual supply prices which act as a guidance for the rest of Asia, show price levels in the mid-$90 per tonne for 2018, according to several sources with knowledge of the matter.
A Thomson Reuters poll of analysts in March shows an average forecast for spot Australian Newcastle physical coal at around $87 a tonne this year, $80 in 2019 and $73 in 2020.
GRAPHIC: Coal use by region 2000 to 2016: reut.rs/2Ep3x4K
One of the surprises over the past year has been China, where many analysts expected a decline in coal demand due to its drive to use more renewables and move millions of households to use natural gas for heating.
Although China’s plans to switch to cleaner fuels has led to a gradual decline away from record coal consumption between 2012 and 2014, demand for coal is still firm, as many power stations and industrial facilities still rely on the commodity.
Restocking by utilities after the lunar new year prompted a 20 percent jump in coal imports in March from a year earlier, customs data showed.
However, several ports in China have introduced restrictions on coal imports as the government tries to support domestic coal prices and encourage more local production.
It is unclear how long the restrictions will last and whether they will reduce demand, but they are unlikely to affect Australian or Russian exports of coal, which are high-quality grades.
“Coal production in China dropped sharply in January-February due to the New Year holiday, but we expect output ... to rise this year as lower imports boost demand for domestic coal,” said consultancy Capital Economics.
“Of course, government policy can significantly alter the dynamics of the market. Further interventions by the Chinese government on either the supply or demand side are a risk to our forecasts.”
Elsewhere in Asia, imports by Japan and South Korea also remain strong. More than 40 percent of South Korea’s nuclear generation is currently offline, which has driven the need for increased coal use.
Coal’s rally since 2016 has revived companies like Peabody from bankruptcy. Tempted by high prices, many miners are now eyeing higher output.
For the first time in years, over the past two quarters, 80 to 90 percent of global miners have been making money due to higher coal prices, said Georgi Slavov, head of research at commodities brokerage Marex Spectron.
He warned, however, that rising production could weigh on prices and profits again towards the end of the year and into 2019.
GRAPHIC: Asia's coal imports are much higher than for LNG: reut.rs/2EqwFbY
Reporting by Nina Chestney in LONDON and Henning Gloystein in SINGAPORE; Editing by Raju Gopalakrishnan
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