November 16, 2020 - Physical RB1 coal enjoyed a strong rally last week, driven by firmer prices for December loadings. Spot prices shifted up significantly, whilst the discount with API#4 narrowed as well, reflecting the stronger physical demand.

However, the discounts for lower-grade coal, such as RB3, increased. This discount spread looks like a seasonal trend now as the anticipated Q4 rally gets underway.

Both crude oil and natgas also started last week much stronger as a vaccine for Covid-19 was announced, giving up some of their gains towards the weekend.

With US coal giant Peabody facing bankruptcy for the second time in five years, the coal industry is increasingly looking to metallurgical coal to save it, with steel being the key ingredient for a much anticipated global infrastructure rebuild. Iron ore prices are also having a bumper time, and India’s sponge iron sector will probably become even more vital for South African export coal.

Eskom is apparently seeking to become carbon-neutral by 2050. With Medupi and Kusile only just coming online, this implies a significant amount of carbon dioxide drawdown required by then e.g. woodlots and carbon soil and plant sequestration etc. These of course provide sustainable jobs and alternative revenue sources, which we are strong advocates for, building practical paths towards that vision.

As we said last week, there is just enough time to save short-term momentum (MACD) from breaking down. Indeed, we have now seen a strong rally as the signal line cements its place in positive territory.

However, price action is extremely lacklustre as compared to last year. Momentum will most likely peak in the next couple of weeks and yet price is nowhere near the highs reached last year. This all but guarantees a lower high for this cycle, and most likely a depressed price environment going into 2021.

With price on the run now we expect to see further upside towards the end of the year, targeting around $70, possibly even $80. The December / January period is likely to be a perfect time for miners to lock into longer term fixed price offtakes, although we suspect the forward curve will be reflecting some backwardation at that point. If not, that would surely be a gift grom the “trading gods” for miners.