Markets | Coal
Pacific thermal coal markets
The market for Pacific thermal coal in 2007 was characterised by strong demand growth, estimated at in excess of 13% during 2007, together with continued supply disruptions.
Demand growth was underpinned by surging Chinese imports and supported by strong growth in Japan, Korea, Taiwan, India and Thailand. Chinese coastal power stations sought additional imported coal to fill domestic supply shortfalls. Japanese coal-fired power stations required additional coal to compensate for extended nuclear power station outages, while new power stations and robust economic growth created new demand in Korea, Taiwan, India and Thailand. Domestic coal supply shortfalls in India also resulted in higher imports.
Australian thermal coal exports were hampered throughout 2007 by a combination of infrastructure constraints and weather events, containing export growth to just 1% over 2006 levels. Infrastructure constraints and the loss of 2.5 million tonnes throughput at Newcastle port due to storms in the Hunter Valley in June led suppliers to focus on higher value metallurgical coal products, impacting thermal coal export growth.
In China, the removal of the VAT export rebate for thermal coal in late 2006, coupled with the addition of 96GW of new coal-fired power generation capacity during the course of 2007, contributed to a 15% reduction in thermal coal exports. Chinese exports continue to be restrained in 2008 due to ongoing domestic supply shortages.
An extended and significant wet season disrupted Indonesian coal supply and limited export growth to 10% during 2007, significantly below 2006 growth of 32%. Approximately two-thirds of new Indonesian supply is sub-bituminous coal and therefore does not directly compete with the majority of Australian coal. The higher proportion of lower quality sub-bituminous coal from Indonesia, growing imports into and lower exports from China and limited Australian supply growth contributed to strong market conditions and marked spot price increases for Pacific Basin coals.
Following the Australian/Japanese term contract settlements in March 2007 the spot thermal coal price remained stable until June, when supply shortfalls occurred following adverse weather in New South Wales. Spot prices steadily increased through the second half, reaching all-time highs of over $90 per tonne in December. During the third quarter, mid-year annual contracts with Japanese thermal coal customers for delivery periods commencing September and October were agreed in a range from $65 to $75 per tonne.
The Asian market, predominantly Japan, Korea and Taiwan, continues to account for approximately 90% of Xstrata’s managed export thermal coal sales from Australia. Term and annual contracts represented 75% of Xstrata Coal’s Australian managed export thermal sales in 2007, with the balance sold on the spot market. Domestic Australian sales, typically long-term contracts with power utilities, accounted for approximately 20% of overall thermal coal sales.
Outlook
In January 2008, flooding in central Queensland further reduced Australian export supply. Additionally, extreme weather in China caused domestic coal stocks to decline further and led to restrictions being imposed on Chinese exports from February to mid-March, boosting spot prices for Australian thermal coal to in excess of $130 per tonne. The dominance of coal-fired capacity as base load generation in Asian markets and rising prices of other energy sources, limits the potential for fuel switching. Pacific market conditions in 2008 are expected to remain very strong as Australian infrastructure constraints, recent flooding in Queensland and the potential for ongoing supply disruptions continue to inhibit supply growth. Continued domestic supply shortfalls in India and China together with restocking by Chinese power stations will encourage import growth whilst new capacity additions in Korea and the ramp up of power station capacity in Thailand will further strengthen demand growth.
Atlantic thermal coal markets
Spot thermal coal prices in the Atlantic strengthened from just below $50 per tonne to approximately $95 per tonne during 2007. A mild European winter both at the start and end of 2007, coupled with lower gas prices during the summer months and low demand periods, was offset by supply-side constraints in Russia, South Africa, China, Indonesia and Australia. Bullish Pacific Basin fundamentals also provided strong support for the Atlantic market, causing a sharp increase in prices in both markets, with spot prices for South African coal at over $90 per tonne during the last quarter of the year.
The price of European Union Emissions Trading Scheme (EU ETS) Phase 1 credits steadily decreased during 2007, from approximately E5 per tonne of CO2 in January to levels below E0.10 per tonne by year end, due to an excess of credits in the market. Phase 2 credits, applying from 1 January 2008, have traded in a range from E17 per tonne to approximately E23 per tonne at the start of 2008, reflecting the market’s expectation of tighter national allocations for the second phase of the EU ETS. Despite higher Phase 2 CO2 prices, higher gas prices have ensured coal has remained competitive as a power generation fuel.
Incremental demand for South African coal in Asia, primarily India and Pakistan, is expected to contribute to tight export availability for 2008, mitigating subdued demand from Europe.
Annualised Richards Bay Coal Terminal throughput in 2007 was marginally lower than 2006 as supply was impacted by a combination of rail capacity and coal production constraints. Russian thermal coal export supply grew by approximately 4 million tonnes or 6% despite rail logistics constraints during the second half of the year. Polish exports came under pressure from growing domestic demand and production shortfalls and declined by more than 3 million tonnes year-on-year. The majority of export growth from Colombia in 2007 was absorbed into the North American and European markets. Domestic coal prices in the US continued to recover throughout 2007 from lows in 2006 but remained below import prices. Record international prices in the latter half of 2007 attracted an incremental 4 million tonnes from US suppliers to the export market. Rising US domestic prices have eroded the export premium and are likely to discourage additional US exports in the near term.
The South African domestic market remained buoyant on the back of tight availability of higher quality coal. Production shortfalls and the resultant available coal chain capacity enabled producers to switch higher grade production originally destined for the domestic market to the higher margin export market. This has resulted in robust increases in market prices for non-Eskom domestic coals.
Outlook
Sustained supply-side constraints early in 2008 caused spot prices to rise above $110 per tonne during January 2008. Supply-side constraints in 2007 and in early 2008 have resulted in an overhang of contracts to be fulfilled and are expected to lead to continued restricted availability in the Atlantic market. Rationing of power consumption by the South African mining industry, rolling blackouts and possible incremental demand from Eskom due to the South African electricity crisis, may result in further pressure on supplies to the export markets from South Africa. These pressures have been exacerbated by extremely high rainfall during the last quarter in 2007 and first quarter of 2008 in South Africa, causing further supply disruptions. These factors contribute to a positive outlook for thermal coal pricing for the balance of 2008.
Coking coal markets
Further growth in global production of pig iron fuelled robust demand for coking coal in 2007. Globally, demand for imported coking coal grew by 10 million tonnes in 2007, spearheaded by higher demand from India, Brazil, Korea and Taiwan. An additional 1.5 million tonnes of demand came from the non-traditional import markets of Ukraine, Russia and Poland, due to lower domestic production. This coincided with the recovery of production at Brazil’s CSN (Companhia Siderurgica Nacional) following the blast furnace closure in 2006 and the commissioning of new coke and blast furnace facilities by two further Brazilian producers, CST (Companhia Siderurgica de Tubarao) and Acomina.
Continued strong domestic demand from Russia is expected to support ongoing import demand growth from this region. At the same time, Chinese seaborne coking coal imports remained in line with 2006 levels.
While Australian coking coal exports increased by approximately 13% in 2007, infrastructure constraints continued to constrain supply growth. Throughput from the Dalrymple Bay Coal Terminal (DBCT) was particularly impacted and declined by 5.5 million tonnes year-on-year due to upgrading work and underperforming rail delivery. Semi-soft coking coal exports from Newcastle grew by 4 million tonnes or 27% in 2007, as new mines ramped up and producers preferentially exported semi-soft coking coal over thermal coal.
Higher exports from Canada and the US, up by 7% and 17% respectively, were offset by lower supply and import demand from Poland, due to lower domestic production. Exports from Russia were lower due to production shortfalls and growing domestic demand.
As supply shortfalls grew in 2007, the price of hard coking coal rose steadily from the term contract price of $98 per tonne to in excess of $150 per tonne by the end of the year. Supply shortages also impacted Chinese coke export prices which began 2007 at $175 per tonne and closed the year in excess of $400 per tonne, equivalent to over $250 per tonne for Australian hard coking coal.
Japanese steel mills remain the dominant buyers of Xstrata coking coal products, accounting for over 40% of total sales including semi soft. Long-term contract volumes account for more than 75% of sales.
Outlook
In January 2008, heavy rains and flooding significantly impacted mine production in Queensland resulting in force majeure declarations from a number of coking coal and PCI producers. Initial estimates indicate that as much as 10 million tonnes of production could be lost by the industry, impacting near term and annual supply and further boosting spot market prices. Without accounting for the impact of further adverse weather events, the market remains very tight for higher quality hard coking coals in 2008, with all production effectively committed to term contract buyers for the balance of the year.
As a result, the spot price is trading at progressively larger premiums to previously settled contract prices as consumers affected by Australian supply constraints compete for the limited volumes available.
Supply-side constraints are expected to continue to dominate the market throughout 2008. Demand growth will remain dominated by Brazil, as newly commissioned blast furnace facilities ramp up to full production in 2008 and further capacity expansions are planned by CSN, Usiminas and Vale, increasing coking coal demand by 7 million tonnes over the next five years.
India will also account for further significant demand growth, as Indian capacity expansions are projected to increase import demand by over 10 million annual tonnes by 2010. In South Korea, the Hyundai group is constructing a new steel plant, which, together with the new Dragon steel plant in Taiwan will add in excess of 4 million tonnes per annum of new demand. Importantly, new coke ovens will require significant volumes of premium hard coking coal in their coke blends. Further new import demand is also likely in the Eastern Bloc in order to replace domestic and Russian supply shortfalls.
The ongoing need for high quality hard coking coal to maintain coke oven and blast furnace productivity will underpin pricing for prime hard coking coals, which are expected to remain very robust throughout 2008 and spot prices have recently exceeded $300 per tonne.
Continuous miner at Tavistock underground coal mine, South Africa
Matthew Thomas, operator at United underground colliery, NSW, Australia