Commodity Markets In 2020
LNG
The Researchers analyzed that the market is still struggling to digest the glut of LNG that they are presently experiencing. Asian LNG prices have been weak for much in 2019 as they continue to see a ramp up in supply from the US, Australia and Russia. The autumn rally that they have seen has been short-lived, with the market under pressure once again even as they move into winter. The pressure on Asian prices has also had an impact on hubs in other regions, with record volumes of LNG making their way into Europe this year. They predict much of the same for next year, with supply expected to ramp up further while there will still be questions about the demand outlook, particularly given concerns over slowing growth and contracting factory activity. The gap between LNG supply and demand growth has widened in 2019, with demand unable to match the pace of supply they are seeing at the moment. Global LNG supply has increased by around 30-35mt in 2019 with most of this coming from the US, Australia and Russia. They also hoped that another 30mt of LNG supply could be available to the market in 2020 as capacity start-ups in 2019 (including Cameron T1, Elba island and Freeport T1) continue to ramp up while new projects (including Freeport T2-3 and Cameron T2-3) come online over the course of 2020. China’s LNG imports have increased by 14 percent year-on-year to 47.74mt over the first 10 months of 2019, healthy growth by any standard. However, this masks some concerns. This level of demand growth is much lower than the 30 percent+ seen in recent years. In addition, LNG imports in the month of October fell 11 percent YoY- which is the first YoY decline in LNG imports since July 2016. There are a number of reasons why growth has slowed. Previous growth rates were unsustainable and largely reflected the coal to gas switch for home heating. Furthermore, with another surplus year expected for the LNG market, and assuming similar trends in the Asian market once again in 2020, it appears that they will continue to see sizeable LNG inflows into Europe. As things stand at the moment, this supply is likely to keep the pressure on European hub prices. However, negotiations around the Ukrainian transit deal for Russian gas, which is set to expire in January, present a key upside risk for the European market. Failing to come to a new deal will be a bullish development for the European market. The Russians are reluctant to provide another 10-year transit deal, with new pipelines set to connect with European hubs- including the 55bcm/year Nord Stream 2 pipeline, which could start operations in early 2020.
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Coal
The Year 2019 has been a year of weakness for thermal coal markets, with API2 prices down more than 37 percent since the start of the year, and trading down to levels last seen in 2016. The ramping up of LNG export capacity has increased the availability of cheaper alternative fuels for power generation, while in Europe stronger carbon prices mean that gas has been favoured as a feedstock over coal for power generation. For 2020, it is difficult to see this trend reversing. LNG supply is expected to increase further which should keep gas hub prices relatively week and, as a result, coal prices too. Furthermore, they would expect carbon prices in the EU to remain well supported, with the Market Stability Reserve managing carbon allowances in the market. They predict to see a general shift away from coal power generation to cleaner fuels elsewhere as part of the broader energy transition trend. The demand outlook for coal in Europe remains negative. 2019 has been a year where they have seen record LNG volumes flowing into Europe, given the ramping up of LNG export capacity. Meanwhile, the EU’s Emission Trading System has become increasingly more effective due to the strength they have seen in carbon prices. As a result, spark spreads in Europe will likely remain more attractive than dark spreads, which should continue to support the coal-to-gas switch for power generation over 2020. In Asia, several markets in the region have seen weaker demand so far over 2019. In Japan, cumulative thermal coal imports over the first ten months of the year are down around 3 percent YoY. The restarting of nuclear capacity in the country is a key factor behind this weakness and with further applications for reactor restarts, they would also predict this will continue to weigh on Japanese coal imports in the longer term. South Korea has also seen weaker imports. Over the year the country has temporarily shut down several coal power plants in order to try to lower pollution levels, and similar action will be taken over this winter with the government idling a number of plants. This suggests the outlook for coal demand from the country will remain fairly week as they move through 2020. China, however, has performed fairly well with imports, with volumes over the first ten months of the year increasing almost 8 percent year on year. China is key for the seaborne market, and what makes it more challenging is the uncertainty around government policy. In recent years the government has intervened to try to stabilise the domestic market. This could have a dramatic impact on the seaborne market should the government feel the need to take action again in 2020. Domestic coal prices are trading down at levels last seen in 2016 and, if there is further weakness, the government could look at the possibility of restricting imports to try to support the domestic coal industry. Given that the demand outlook appears to be relatively more bearish in Europe than Asia, they would expect to continue seeing Newcastle coal trading at a healthy premium to API2. However, the key risk to this view is if China does clamp down on imports over the course of 2020.