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UBS trims coal outlook as US-China trade war escalates

Source: Montel, August 16, 2019

The Swiss bank now sees the Newcastle coal price averaging USD 77/t over 2019, down from USD 80/t previously, and falling to USD 70/t next year, down from USD 75/t previously. 

The bank’s previous forecasts were predicated on the US and China finding a way to resolve their trade dispute this year, it said in a note on Thursday.  

However, a deal looks increasingly unlikely after president Donald Trump this month issued a fresh round of tariffs on Chinese goods from September.

Risks were now “finely balanced”, with China likely to respond with stimulus measures to counter the impact on its economy. Yet these were unlikely to prove extensive enough to revive bulk commodity prices, the bank added.   

“Following cuts to global GDP growth forecasts and with no material commodity intensive stimulus to act as an offset, the prospect of a material recovery in commodity demand [over the second half of 2019] appears limited.”

As a result, forward base metal and coal prices had little potential to climb relative to the spot market over the next 12-18 months, it said. 

GlobalCoal’s Newcastle Index last settled at USD 65.03/t, down around 35% since the start of 2019 and its lowest level in around three years. 

Other factors
UBS noted a range of other factors were also maintaining pressure on thermal coal. 

These included Chinese import restrictions on Australian coal deliveries, cheap LNG prices that have encouraged increased coal-to-gas switching as well as increasing volumes of renewable energy.

A surprise end to the US-China trade dispute would most likely have a positive rippling effect across global markets, potentially leading coal prices to rally towards USD 85/t, UBS said.

By contrast, a deteriorating situation and a strong US dollar would push prices well below the cost of some miners’ production, requiring supply to exit the market. This would likely imply prices falling to an average of USD 60/t over 2020-21.

News Source: Montel