Coal

Markets

Pacific Thermal Coal Markets

Coal retains its attractive cost position for base load electricity generation and continues to underpin Asia’s power generation capacity. In 2008, supply in the Pacific Basin was again characterised by reduced Chinese exports, higher levels of lower quality exports from Indonesia and continued infrastructure constraints in Australia. Coal production from Indonesia is split in the approximate ratio of 45% bituminous, 45% sub-bituminous coal and 10% low-rank coal. An increasing proportion of the sub-bituminous and low-rank coal has a very low energy content, below 5,000kcal/kg gar and does not compete directly with Xstrata’s higher quality Australian bituminous coal production.

Demand in the Pacific market grew by only 2% in 2008, whilst supply grew by only 1%.

Although Australia and Indonesia recorded supply growth of 10% and 8% respectively, overall supply was minimal due to a 26% reduction in Vietnamese exports and a 19% reduction in Chinese exports.

Record thermal coal contract prices were achieved by the major Australian coal producers with major Japanese contract customers for the year commencing 1 April 2008, resulting in a 2008 benchmark price of $125 per tonne. This represented an increase of $69.50 per tonne, 125% higher than the previous year. During the third quarter, Xstrata Coal agreed mid-year annual contracts with Japanese consumers, in the range of $130 to $155 per tonne.

Xstrata’s Pacific market thermal coal sales remain dominated by Japan, Korea and Taiwan, which account for over 75% of sales. Term and annual contracts represented approximately 80% of Xstrata Coal Australia’s thermal coal sales in 2008 with the balance sold on the spot market.

Outlook

Coal’s competitiveness with alternative fuels is expected to continue to underpin its position as a base load fuel for power generation notwithstanding the effects of the global economic crisis on overall energy demand. It is expected that the recovery in Mexican thermal coal imports, the commissioning of further generating units in Korea, together with India’s requirement to increase imports to meet its domestic needs will contribute to stable coal demand in 2009.

Improved productivity at Ulan Underground in New South Wales, Australia, contributed to the 15% increase in saleable production during 2008 by the Australian thermal coal operations

Atlantic Thermal Coal Markets

Higher oil and gas prices in the first three quarters of 2008 contributed to significant increases in Atlantic thermal coal prices during this period, despite a mild European 2007/08 winter. Declines in European domestic production, buoyant European electricity markets and sustained supply-side constraints provided further support to coal pricing. The impact of the global financial crisis and the subsequent recession of major economies resulted in oil and thermal coal prices retreating in the fourth quarter from the record highs achieved earlier in the year. European demand for imported coal remained at a similar level to the previous two years.

Exports of South African coal were down by 6% compared to 2007, due to the combined impacts of inconsistent rail transport performance, heavy rainfall during the summer and occasional power supply disruptions. Incremental demand from the sub-continent and Pacific markets, coupled with lower freight rates in the last quarter, further curtailed coal availability from South Africa for Europe, its principal market. Increased exports from Colombia and the US have largely been balanced by supply shortfalls from South Africa, Russia, Poland and Venezuela. Inadequate rail infrastructure and rising domestic market demand restricted exports from Russia, while rising domestic demand in Poland resulted in exports falling below 2 million tonnes.

Volatile spot FOB prices increased from just below $100 per tonne in January to a high of over $170 per tonne in July but fell to below $80 per tonne by year-end. Significant premiums to the index for standard quality South African coal have been reported throughout the year as a result of limited availability.

The South African domestic market remained buoyant amidst tight availability linked to production shortfalls and incremental increases in demand from Eskom.

Outlook

Uncertainty in the world financial markets and the global recessionary environment are likely to result in further volatility in the energy complex in the near and medium term. Reduced exports from the US and declining European coal production are expected to offset the effects of lower industrial electricity demand in Europe on seaborne thermal coal demand.

back to top >

Coking Coal Markets

Coking coal markets experienced significant fluctuations in supply and demand throughout 2008. The first half experienced unprecedented customer demand for available tonnes, following the extreme flooding events in Queensland during the first quarter which severely restricted the availability of prime hard coking coal and reduced Australian coking coal export supply in the first half by 6 million tonnes. Steel producers looked to US suppliers to cover the supply shortfall, lifting US exports by 9 million tonnes over the full year.

In stark contrast, the second half of 2008 saw the steel and manufacturing industries significantly impacted by the sudden global financial liquidity crisis, resulting in reduced customer demand for all grades of metallurgical coal. Full year 2008 data indicates global steel production in coking coal importing countries grew by only 1% over 2007, leading to increased coking coal demand of 8 million tonnes. Australian and Canadian metallurgical coal exports were marginally below 2007 levels.

In April, term prices of $300 per tonne were agreed with customers for prime hard coking coals for the year ending March 2009 by the leading producer. This settlement represented an increase of $202 per tonne (206%) over the previous year, and in some cases includes the cancellation of some of the carry over arising from the floods in Queensland in early 2008. With the exception of Xstrata, all other hard coking coal suppliers subsequently settled at an equivalent price level.

Xstrata concluded its 2008 price negotiations with term customers while simultaneously developing a new customer base largely within the rapidly expanding Indian steel industry. For the contract year commencing April 2008, the average contract price for prime hard coking coal agreed was $360 per tonne.

Asian steel mills and Australian coal producers settled prices for NSW high volatile semi-soft coking coals at approximately $240 per tonne, which applies for the contract year commencing 1 April 2008 representing an increase of 276% over last year’s term price of $63.90 for Xstrata brands.

Term and annual contracts account for in excess of 70% of Xstrata’s hard coking coal and semi-soft coking coal sales. Xstrata’s hard coking coal is sold into each major market while Japan remains the dominant market for semi-soft coking coal.

The Colombian Cerrejón operation achieved a record operating result in 2008 as it ramps up to 32 million tonnes per annum.

Outlook

The coking coal market in 2009 is expected to remain heavily affected by the global economic downturn. In response to low prices, approximately 24 million tonnes of coking coal production curtailments have been announced for 2009 representing approximately 13% of planned production levels prior to the economic downturn in the second half of 2008. However, until steel consumption begins to recover, all metallurgical coal grades will continue to be in oversupply, although the declining value of the Australian dollar will provide Xstrata with some cost offset to declining prices.