Asian coal, LNG prices surge as China's economic engine powers up

Seaborne thermal coal prices have hit multi-year highs, and spot Asian LNG prices for summer have not been this strong since summer 2018, on the back of power and feedstock demand as economic activity in China rivals the post-pandemic resurgence in the US.

Electricity supply is being rationed to prevent blackouts and manufacturing hubs in southern China are reporting a surge in both domestic and overseas orders, indicating that the US economic rebound could well be pulling up energy demand globally.

Economists have been expecting this post-COVID rebound, and the bullish factors supporting energy prices have come together rapidly, including the so-called great demand rotation as consumers return, less permanent damage to discretionary spending than expected, and fiscal policies that helped businesses pull through.

However, despite the accelerated recovery, pandemic-hit supply chains have not fully recovered; factories are still struggling to restore shipments of raw materials, oil and gas projects are still struggling to bring in technicians and engineers for repairs on time, and capital spending has not fully normalized -- all of which are exacerbating the price squeeze and commodity price inflation.

In fact, the surge in commodity and energy prices prompted the Chinese government to crack down on retail speculation in the financial markets. As the recovery remains unbalanced, many sectors continue to languish, new outbreaks have been reported in southern China and the pandemic in South Asia and Southeast Asia continues to worsen, which means Asia is still not out of the woods yet.

Coal market imbalances

In the coal market, offers for Qinhuangdao 5,500 kcal/kg NAR and 5,000 kcal/kg GAR were around Yuan 920-950/mt and Yuan 820-850/mt on June 3, according to traders, from around Yuan 542/mt for FOB Qinhuanghao 5,500 kcal/kg NAR a year ago.

China is working to ensure coal supply and stabilize coal prices amid market imbalances coupled with rising temperatures, and the State Council has chosen to prioritize supply security over price regulation, boosting market sentiment, a south China-based trader said.

Matthew Boyle, Head of Coal and Asia Power, S&P Global Platts Analytics, said: "Average global seaborne coal prices jumped to at least a two-and-a-half year high in May 2021. In the case of Indonesian coal prices, they surged to an over nine-year high, and low CV 4,200 kcal/kg GAR Indonesian coal reached its highest level since Platts started assessing this grade of coal in July 2012."

He said all key benchmark coal prices (Australia, South Africa, Europe) have more than doubled from their 2020 low price point, and FOB Newcastle prices have nearly tripled, but cannot be supported by market fundamentals.

"There remains some froth in spot coal prices, and this is also reflected in the forward curve market," Boyle said, adding that there is a short-term squeeze on supply and demand rather than a fundamental sustained uptick in Chinese demand.

"We believe poor hydro generation in April and May saw prolonged coal generation, which has seen a need for utilities to restock," Boyle said. "However, with improving hydro and renewables generation in China, this reduces the thermal gap in generation and should see a decline in domestic and seaborne coal prices."

LNG, European gas and carbon prices

S&P Global Platts JKM for July was assessed at $10.95/MMBtu on June 3, from just over $2/MMBtu a year earlier, supported by Chinese demand and strong correlation with European gas prices that have risen due to a record surge in EU ETS carbon prices.

"If carbon prices were to hit $100/ton it would certainly be supportive of gas prices in Europe and in turn would push JKM higher as Asia needs to incentivize cargoes into the region to help feed strong Chinese gas demand along with storage restocking efforts in Northeast Asia," Jeff Moore, manager, Asian LNG at S&P Global Platts Analytics, said.

The recent price support is both demand and supply driven, although it probably tilts more towards the demand side given extremely strong volume requirements from China so far this year, Moore said.

In mid-May, Morgan Stanley said strong demand and supply outages had accelerated the LNG market rebalancing into 2021, ahead of 2022 previously expected, and raised its 2021 JKM forecast to $8.75/MMBtu, from $7.50/MMBtu.

LNG demand had outpaced expectations, with China the biggest outlier, boosting imports in the January-April period by 28% or 5.5 million mt year on year, the bank said.

Earlier in May, Citigroup had lifted JKM LNG price forecasts for the second and third quarters to the high $9-$10/MMBtu range, from a $7-$8/MMBtu range due to strong Asian demand and rising European carbon prices.

"As for the rest of the year, Platts Analytics expects storage restocking efforts to start to accelerate in Europe, which will help cool prices in the months ahead, although a relatively healthy JKM-TTF spread is expected to persist through the remainder of the year given the pull on supply from the strong demand we're seeing," Moore said.