A coal-fired power plant in Vietnam. Demand for coal rose in China and Southeast Asia in 2017, but U.S. producers have trouble directly accessing the markets. |
Rising demand for thermal coal from China and Southeast Asia could indirectly benefit U.S. producers, but uncertainty about the long-term viability of the Chinese market could put a damper on export hopes.
Southeast Asia and the question of Chinese demand
Chen Guangzhi, a Singapore-based investment analyst with Phillip Securities Research, said the seaborne export coal market in Southeast Asia is tightening as producers play catch-up with aggressive government electrification plans.
Indonesia has set large targets for increasing power plant generation, which Chen said will result in double-digit growth over the next few years.
However, coal producers in Indonesia are scaling back expansion plans partly due to trouble finding funds in local capital markets.

"[Local] banks are not very confident in coal mining [business] because of the pain in the past," said William Simadiputra, a coal analyst at DBS Vickers Securities.
A cold winter that caught Chinese producers off guard has driven a recent uptick in the country's imports, according to Andy Blumenfeld, head of market analytics with Doyle Trading Consultants. China's coal consumption dwarfs that of most other markets, but the country is involved in a "tricky balance" maintaining the coal price high enough so state-owned mines continue to operate and service their debt without unduly burdening the electric utilities and their ratepayers.
Matt Preston, research director of North America coal markets at Wood Mackenzie, said Chinese policy also wavers as the country tries to clean up its coal industry while keeping people employed.
"Sometimes they overshoot and there's not enough production in the domestic markets, and sometimes they undershoot," he said, adding that at the high volumes China works with, government changes to production levels can result in a fairly heavy-handed manipulation of overseas markets.
"It's easy for [China] to blow up the international markets by twiddling with their domestic market," Preston said.
According to Blumenfeld, these factors make it very difficult for international traders or producers to make a long-term play off China's market.
Even the Indonesian industry has low confidence in China, which is restricting its use of lignite largely supplied by the Southeast Asian country due to environmental concerns, Chen said.

US access limited by port capacity
Blumenfeld said he is watching the international market with great interest, but cautioned that only a handful of U.S. producers can actually take advantage of high prices on the Newcastle index in Australia.
The industry ships some coal from the Uinta Basin through California ports with limited capacity, and CEO and founder Robert Murray said Murray Energy Corp. is shipping tons through the Guaymas port in the Gulf of California in Mexico, though mostly to South Korea and Japan. Canadian port Westshore Terminals LP provides a little relief to producers like Cloud Peak Energy Inc., and Lighthouse Resources Inc, but that facility is running at near capacity as well.
Preston said Colombia, whose coal is similar in quality to Uinta coal, has a logistical advantage over the U.S. because it can ship to China from a number of Caribbean ports close to the Panama Canal.
Planned coal terminals, such as Oakland Bulk and Oversized Terminal in Northern California and Lighthouse subsidiary Millennium Bulk Terminals-Longview LLC in Washington state, could help boost U.S. exports, but both are fighting state and local governments over the permitting and approval process. If they succeed in court challenges, Blumenfeld said it would be years before Millennium Bulk could conceivably start loading vessels.
A Lighthouse spokesperson said that even if Millennium Bulk was operating at full capacity, the coal shipped through the facility "would represent less than 5% of projected total Asian demand for coal imports."
Waiting on the trickle down
Direct U.S. coal exports to China and Southeast Asia are limited, with only two countries importing significant amounts in 2017, according to data compiled by S&P Global Market Intelligence. However, analysts often speak about demand in Asia resulting in a trickle-down effect when it comes to the global supply chain.
"All the coal is being drawn out of the Atlantic Basin into Asia, and the U.S. gets the backfill for that," Preston said. Traditionally this means European markets will pick up more coal from the U.S., but Preston said other than during a recent cold snap, demand in Europe is fairly low for thermal coal.
The farthest most Eastern thermal coal reaches is India, which is buying a lot of high-sulfur product from producers in Northern Appalachia and the Illinois Basin to burn at its cement plants, according to Blumenfeld and Preston.
Down the road
Preston believes that while U.S. producers face challenges reaching the market today, the future may be brighter in parts of the Asian market.
"What we expect to happen in the long term is that Indonesia and Australia, for either logistic or cost reasons, will not be able to increase or produce as much as they've been producing," he said.
Indonesia will export less coal as domestic demand increases, while Australia would need to overcome opposition to the coal industry and build significant infrastructure to continue to serve markets at current levels, Preston said.
In China, long-term growth is less clear. Steve Hill, executive vice president for gas and energy marketing and trading from Royal Dutch Shell PLC, said in a Feb. 26 special call that small industrial and district heating facilities in the country are switching from coal-fired boilers to gas-fired boilers.
"This we see as one-off structural change, and we see it as continuing," he said.
The International Energy Agency has similar predictions about China, forecasting decline in domestic thermal coal consumption through 2022 due to gas switching and a focus on improving air quality.

