NEW YORK – Citibank says it expects strong demand for coal from Southeast Asia and China over the next two years and has upgraded price forecasts to reflect that.
Because these two markets are the world’s largest consumers of coal, the increase in expected prices marks good news for West Virginia and U.S. coal producers.
Citibank raised price forecasts for thermal and coking coal for the next two years, signaling expectations that prices should stay higher longer than some anticipated.
“The forecast upgrades assume China will remain a strong coal importer of seaborne coal until 2020, due to rising domestic coal production costs and limited prospects for large-scale supply growth from stricter environmental and safety regulations," said John "Max" Wilkinson, an attorney in the Environmental Practice Group at Spilman Thomas & Battle in Charleston.
The president of the West Virginia Coal Association welcomed the news.
“That would be great,” Bill Raney said. “I hope they’re right and that their crystal ball is very, very clear.”
The forecast says growth in Chinese coal output is expected to be limited in both thermal and coking coal the next 24 months.
“We expect medium-term coal prices to stay ‘higher for longer’ and raise our thermal coal price forecast for 2019 to $85 a ton from $75 a ton and forecast for 2020 to $80 a ton from $65 a ton,” Citibank said.
The company is basing the price upgrades on the theory that China will import more coal for the rest of this decade due to higher domestic coal production costs and limited production growth due to stricter environmental and safety rules. Citibank also notes a wave of new coal-fired power projects in South Asia and Southeast Asia are expected to become operational over the new few years and that capital expenditure by Chinese coal producers has fallen sharply.
Coal prices performed better than expected last year despite many countries moving toward cleaner fuel sources. Raney says the key to West Virginia staying competitive in this market is to keep production costs in check.
“Our costs are typically higher here because of the accessibility of the reserves as well as the fact that when you’re dealing in the metallurgical coal seams, they’re typically the thinner seams,” he said. “If they are correct about that, then we’re pleased. We’re hopeful that the prices are going to hold steady and stable and even increase some.
"That’s all good for West Virginia.”
Raney also noted the issue of higher severance taxes in West Virginia and its effect on coal production costs.
“Our severance taxes are higher than any other state we compete with and that’s enormously important,” he said. “We need to talk about that because we think if the severance tax rate could come down, then we’ll probably mine more coal and we feel like it would balance out.”