European coal trades 2012

This year has been what appears on the surface to be the least active one for European coal trade for many years. While European coal buyers and traders have been less visible than those in Asia and other parts of the world, the consumption of coal for power generation and steel making has been continuing at a subdued level. A year ago we said a similar thing when the European coal markets continued to be less spectacular than those in Asia and the Americas. The economic situation in parts of the European Union had an acute impact on financial markets a year ago, and the impact on the energy and steel markets that was seen then has not been able to recover as further problems have occurred this year. Coal industry professionals are still facing challenging times in Europe, and in addition to the difficult markets there have been unexpected penalties on some. Examples include carbon tax penalties on a coal producer in the United Kingdom which has seen its share price collapse while it seeks to remedy the situation with the government.
The coal industry in Europe has not seen what it might have expected this year as 2012 got under way. In terms of the global economy, 2012 got off to a better start than had been expected in some aspects, with employment data from the USA showing encouraging improvements. Financial markets had been showing more positive signs during the first week of 2012 and the mining sector took a boost after some positive trade data was published in China. In the coal sector, the wet season in Queensland had so far not disrupted coking coal production significantly, and with lower demand at that time, there was not likely to be much upward impact on prices. Traders had been anticipating a softening trend in the spot price in the first quarter, with some possible change in March if the Chinese picked up demand. The much milder winter in Europe had kept a cap on thermal coal demand, with consumers understood to also have had high stocks of coal on their pads.
In January, little market activity was being seen but there were other issues being reported amid the depressed economic situation. In Bulgaria, there was a dispute at the Maritza East coal mine after workers sought to negotiate new wage levels. Production there during 2011 was reported to have been around 33mt (million tonnes) which was 6mt above target. The disruption started on 15 January when the first stop work action was reported. Some countries had seen some growth in coal activities last year, and in Poland coal imports reached a new record in 2011 with around 16mt recorded. The largest supplier was Russia with 7.4mt reported. Meanwhile in Ukraine, Chinese investors were understood to be looking at assisting the country to reduce dependence on gas for district heating. A switch to coal was being planned, and the country was mindful that it had faced disruption to gas supply from Russia in the past.
At the start of 2012, the major coal producing companies had begun announcing their performances in 2011 as early data was published in some countries. Some European coal spot price indices were said to have been impacted by a downgrade in the credit ratings of some European countries, although the effect seemed to have been short-lived at that time.
By mid-January, thermal coal spot prices were generally a little firmer in all the major spot markets, with only a slight decrease being reported for South Africa. The significant movements in freight rates last year had influenced producers’ offered prices, particularly into Europe. In January there was little differential between the Colombia – ARA rate and South Africa – ARA rate, although little spot business was being done at that time. Heavy rains continued to disrupt coal exports from Colombia, with delays of more than two weeks being reported at the ports. This was a concern for customers of Cerrejon and Drummond in Europe, and they faced further problems as the year progressed. Colombian shippers were reported to have been discussing supplies with consumers in the eastern Mediterranean over the first couple of weeks of the year, and buyers were believed to have been bidding around US$100/t FOB (free on board) basis 6,000 kcal/kg NAR (net as received) while the exporters were asking a little over that figure for deliveries during Q1 2012. While this year has seen weakness in the market for thermal coal, the spot market for Colombian coal at the time of writing is not that much different from what it was in January.
In February, in the United Kingdom there were positive attitudes among the major miners based there despite the downturn in the economic outlook. RioTinto had announced that it was forging ahead with its ‘Mine of the Future’ programme with new technologies in underground tunnelling. These could increase tunnelling rates to more than double those normally achieved at present. The company was also deploying the Automated Train System in the Pilbara region of Australia, making it the first automated long-distance heavy-rail network in the world. Anglo American had reported record production of coking coal from its opencut operations during 2011 despite the disruptions due to rain during the first quarter. A record operating profit of US$1,189m was recorded for coking coal which was an increase of 52% compared to 2010. A record operating profit of US$1,230m was recorded for thermal coal which was an increase of 73% compared to 2010. Attributable production of thermal coal reached 67.436mt in South Africa and Colombia. This was an decrease of 639kt compared with 2010. Australian thermal coal production was 13.426mt which was a decrease of 1.035mt compared with 2010. Export coking coal production reached 14.190mt which was a decrease of 1.380mt compared with 2010. More recently in the United Kingdom, New Age Exploration announced that it is to progress the Lochinvar underground coking coal project in the Canonbie coalfield. More than 400mt of coking coal and PCI (pulverized coal injection) product could be involved in a future operation, with export opportunities through the existing Scottish and northern English coal ports.
The mining sector is believed to have seen almost US$100bn worth of merger and acquisition deals made in 2011, which was a third more than in the previous year. In February, in Switzerland, one of the most anticipated mergers in the international coal world appeared to be gaining momentum. Glencore and Xstrata had reached agreement on a merger which was valuing the new entity at around US$90bn. The merger remained conditional on approval by several competition authorities around the world, but has been delayed by shareholder and other concerns during the past six months or so. Xstrata’s CEO Mick Davis was to be appointed CEO of the new company, with Glencore CEO Ivan Glasenburg being the deputy CEO. The two companies already have close ties, and in Colombia in particular, they have exchanged ownership of coal assets in the past few years depending on their needs. Xstrata bought Glencore’s assets in Australia and South Africa some ten years ago before its IPO (initial public offering) in London. The merger, if it proceeds, is likely to form a key entity controlling much of the coal and commodity production and trading across the globe. Glencore already owned a 34% stake in Xstrata, and when this is taken into account, the value of the new entity has been estimated to be close to US$80bn. The new company had been forecast to generate net revenue of over US$10bn this year, and the merger would provide logical cost savings and greater competitive means against the likes of BHP Billiton, Rio Tinto, and Anglo American. Incidentally, Xstrata reported an average price of US$265/t FOB for its coking coal brands during 2011.
In coking coal and steel market news during the first quarter of this year, Indian steel makers were rumoured to have purchased several cargoes of metallurgical coke from Ukraine. Prices were unconfirmed, but Indian buyers were reported to be paying around US$355/t CIF (cost, insurance, freight). This price was lower than the previous settlements for contract deals for Czech and Polish material at around US$410/t FOB on average for Q1. This suggested the material being sold to India from Europe was at the lower end of the quality range. The price of 12.0% ash metallurgical coke in supplier countries was close to US$350/t FOB at that time, except for China where reports indicated a price of around US$490/t FOB which was pricing the Chinese out of the export market, and no trades had been reported from there. In February, in the United Kingdom, London-listed company New World Resources was reported to have settled the Q1 contract price of metallurgical coke amid a continuing weak steel market. The average price of a variety of coke qualities derived from Polish and Czech coals was reported to be about US$410/t FOB which is a decrease of around 11% compared to the previous quarter.
As elections loomed in Russia, up to US$8.2bn could be invested in the coal industry in the Kuznetsk Basin by 2030 according to Vladimir Putin on an election campaign visit to the region. Total Russian coal output in 2011 was reported to be 343mt with 195mt of that coming from the Kuznetsk mines. Vladimir Putin had hinted that development of the ports of Vanino and Posyet could be accelerated as coal exports to the Asian and Pacific markets expand.