On first inspection of how the thermal coal markets around the world performed in 2011, it might appear to have been the flattest period of price variation for many years as the charts show. Despite appearances which indicate that to be the case for prices, the coal industry has seen as much variety and activity in general as it has always done, but it was a difficult year.
As 2011 drew to a close, thermal coal spot markets had softened in all areas ahead of the holiday season. Business was understood to be thin, and the most visible activity appeared to be in the spot tender markets with the usual buyers issuing enquiries. Coal production in parts of Colombia was reported to be severely disrupted by flooding and heavy rains, and the same situation had been reported for the Venezuelan coal operations. There were rumours from the USA that demand for petcoke had been firmer due to the price competitiveness when delivered to some consumers in Europe. The winter freeze in the northern producing countries including Canada and Russia was expected to tighten supplies of thermal and coking coal in the coming quarter, which some players hoped would cause a firming in the spot prices. Coking coal spot markets remained quiet in all regions around the world, and there was not expected to be much of a pick up until the Chinese came back to market in late January after their New Year celebrations. Meanwhile, the Japanese steel mills had settled the contract price of hard coking coal for supply in Q1 2012 with the Australian and Canadian shippers at US$235/t FOB (free on board) for the reference brand. The European financial situation
continued to worry many players, and political feuds continued between some individuals in the various countries which did not help matters. In December, freight rates were generally softer, with only some firming on the Panamax route across the north Atlantic amid some signs of new coal business there.
The coking coal markets remained muted as the year end approached, with Japanese producers said to be unsure of demand levels in the short term. Elsewhere in the world, coking coal market activity remained quiet. There was a view that less contract business would be done during the weak price period, with mainly spot activity being seen, particularly in Asia. The Chinese government had again moved to influence free market forces by imposing a price cap on thermal coal from January 2012. The move was in response to threats of power station shutdowns from the electricity generators who had been saying they are making a financial loss. There was an increase in electricity prices of 6% from 1 December. Reports from China indicated the economy remained lethargic, and the coal markets did not expect much of a pick up until Chinese demand improved. Elsewhere, the north of the United Kingdom was hit by severe storms, with some impact to coal-related activities. Further adverse weather conditions were seen in the far north of Europe as 2011 came to a close.
There was some anxiety about the approaching wet season in Queensland which could impact coal production once more. This had not, however, led to any firming in the coking coal spot markets, and prices in the international seaborne markets have decreased from Australia to the USA. Some producers and traders are said to be hoping for a rise in the price if the rains dealt a new blow to the mines. Sentiment in the thermal coal markets was for the weaker period to persist for a few months as demand continues to be lower. Despite this, one trader is understood to be expecting that the Richards Bay spot price could rise to close to US$120/t FOB basis 6,000 kcal/kg NAR
(net as received) during the first quarter of 2012. As has been seen in recent years on several occasions, any acute impact on production or supply could send the markets up again. Natural phenomena could do so, particularly the rains in Australia and Colombia. High coal stock levels in Europe, China, and India are attributed to the weaker market activity seen in the closing weeks of 2011.
With China facing power shortages this winter, the National Development and Reform Commission made the third price hike in 2011 despite a softer coal market. In the coking coal sector, BMA was reported to believe the supply/demand balance is widening in global markets. This is one of the main reasons the company has been pushing for monthly pricing and supply contracts during the past couple of years. Coking coal spot markets in Australia softened following a price settlement for Q1 2012 contracts in Korea at US$235/t FOB. Coking coal prices remained firmer in the USA, however, driven by stronger steel output in the domestic market in November.
A year earlier, 2010 had ended with natural phenomena disrupting coal production and trade across the world from Australia to Russia, and Indonesia to the Americas. As 2011 got under way, thermal coal spot markets had been firmer compared to the levels seen before the holiday period began. The severe flooding in Queensland was well publicized across the globe and the impact on coal markets had been serious. This acute tightening of supply led to firmer prices in the coking coal, PCI (pulverized coal injection), and thermal coal markets in Asia and with knock-on effects around the world. South African supply was being increasingly targeted by Asian buyers and this had reduced availability for the Atlantic even further. Rains in Colombia continued to disrupt production and exports from that source as well, and sentiment considered that it would be difficult to meet demand for the foreseeable future.
Cerrejon was reported to be fully committed until April 2011. Suppliers who had seen little trade into Europe for much of 2010 anticipated coal supplies reaching critical levels for many of the major consumers there. Rains continued to hamper output in Indonesia as well. There was speculation that the Richards Bay spot price could reach US$150/t FOB by the start of February 2011, and if the weather patterns continued to impact coal mines in the major producing regions for several months longer, some market players were suggesting thermal coal spot prices could reach the US$200/t FOB level seen in 2008. As it turned out, we saw nothing of the sort over the course of 2011. A year ago, however, other market players suggested that hard coking coal prices could rise to US$300/t FOB during 2011.
In early 2011, the rains were spreading and South African production was being affected by heavy downpours in Mpumalanga Province. The fears of even tighter supply kept spot prices at Richards Bay close to US$130/t FOB basis 6,000 kcal/kg NAR. The severe flooding in Queensland was estimated to have taken almost 5mt (million tonnes) of coal out of the market, with upward price pressure being seen in coking and thermal coal markets. Colombian production continued to be impacted by rains, and Indonesian shippers had not escaped a similar impact.
The winter snow in the USA had affected eastern operations and ports, and the winter freeze was disrupting Russian trade in the north. At the time, it was believed that we may have been heading for a similar surge in coal prices as was seen in 2008. A number of coal industry and related businesses were based in Brisbane and some city centre offices were evacuated due to the flooding in that city. Market players relying on coal price index data published elsewhere had been without critical information as it was shown that no contingency plans were in place.
Mines in Queensland began dewatering operations following the severe flooding across the region. Force majeure remained in place for many producers. Some hoped that financial losses due to the reduced tonnages would be offset by firmer prices for coking coal amid the tight supply situation. Reports indicated that only around 15% of the state’s coal mines were producing at full capacity. A quarter of the mines were waiting to resume operation. Almost A$2.5bn is estimated to have been lost in sales due to the rains last year. Coking coal consumers appeared to be resigned to the fact that price negotiations for the next set of contracts would focus on tight supply and therefore a firmer price. Some had been posturing to indicate they had sufficient stocks to carry them through the crisis, but this seemed unlikely given their earlier difficulties in securing supply when Australia was exporting normally. Indonesian producers were reported to be seeing improved conditions and the concern in thermal coal spot markets calmed down as buyers’ requirements became less urgent. Korean demand was steady, with further buyer enquiries continuing. In the freight market, rates continued to soften due to the impact of the floods in Queensland. Demand for nearby fixings was lower while vessel supply was reported to be more readily available. There were reports of vessels leaving the queue of some 50 days wait off Dalrymple Bay to sail elsewhere as users decided to cut their losses.
Traders were saying that Indonesian spot prices were entering a softening trend following the peaks amid weather- related crises around the world’s major coal producing countries. The Chinese New Year holiday period was expected to have an influence on the market as well, with the usual lull in trade around that time. Australian producers were continuing to feel under threat, however, and cyclone activity was being monitored. Foreign investment in Africa continued with a number of projects in the news. Indian steel makers looked to be in some difficulty over coking coal supply, given reports that Australia supplied 84% of the 36.1mt imported in 2010. The US shippers seemed to be the main source of assistance amid shortages caused by the floods in Queensland, but prices and tonnage availability posed more problems.
Then, in the latest natural phenomenon to impact the coal industry around the world, Cyclone Yasi made landfall near Tully in North Queensland. The category five cyclone was one of the fiercest ever to affect Australia, and was most severe north of the major coal ports of Abbot Point, Hay Point, and Dalrymple Bay. All those ports were closed, but escaped serious damage. Storm surges, heavy rains and flooding followed the cyclone with power outages reported. Gladstone Port was far enough to the south to have escaped the impact. Railings to the northern ports were suspended, and coal mines were further affected by the following rains. Meanwhile, some South African coal producers were concerned that a substantial loss in output could result from adverse weather there. Train derailments, however, were said to be as much of a disruption to coal supply to Richards Bay as any weather-related problems.
The whole picture was then altered significantly in March, when Japan suffered its strongest earthquake on record at 8.9 on the Richter scale, causing significant damage in the north east of the country. There were widespread power outages following the quake, but further damage was caused by the following tsunami along the coast. Nuclear power generation shut down automatically as the quake was detected, but there were serious problems for months following a declaration of a nuclear emergency by the government. The explosion and radiation leaks at the Fukushima plant had a severe impact on the country.
All ports were closed at the time, and there was widespread damage to shipping and infrastructure, with the tsunami penetrating up to six miles inland in places. In a catalogue of natural phenomena impacting the international coal industry around the world in recent times, this was the latest and the most severe to affect a major coal consumer. While coal demand was expected to increase if there were problems with nuclear power facilities in Japan, there was disruption to cargo receivals in the short term. Coastal regions across the Pacific from California to Chile were hit by tsunami. In the aftermath, Germany shut down its aging nuclear facilities which led to an increased demand for coal in the ensuing weeks.
By mid-year, coking coal supply talks were being concluded in Asia and Brazil, with more deals being settled in Europe as well. BHP Billiton achieved shorter-term deals in Brazil which saw the trend extend into Asia and Europe later in the year. Industrial unrest had been simmering in Australia and South Africa. The Asian thermal coal market continued to see more activity while Europe had shown a varied market. Russian shippers were more visible in the Turkish market while Germany was having transport problems due to low water levels in the main waterway, the Rhine.
There were reports that Chinese demand for coal and other commodities had eased as the government moved to cool the economy once more. The expectation was that the situation would improve again during the second half of the year. The proposed carbon tax in Australia was becoming a more prominent political and economic issue once again, with strong views coming from among the ranks of the Australian Labor Party currently in government. Meanwhile, in the USA low water levels on the Mississippi continued to disrupt coal transport in parts of the US Gulf, and this led to a firming of the Panamax freight rates on the main coal routes to and from that region.
Chinese port coal pads were said to be fully stocked, which was preventing any more buying for the time being. The lull appeared to have made some sellers a little pessimistic about the movement of the price over the northern summer months, but there seemed to be no solid basis for that. US coking coal producers were optimistic that export tonnage would reach 60mt in 2011, as Asian demand was expected to remain steady in the coming years while buyers seek to diversify their supply sources.
The demand for Colombian coal in the Asian markets had returned to a trickle during the northern summer months after rising substantially in 2010. Perhaps the buyers realized that they would have to pay realistic prices for coal of a quality they really need, after reports elsewhere in 2010 suggested the Colombian coal was selling for well under spot market levels. Lower quality material was said to be available but there appeared to be no takers in mid-2011. While the quarterly contract price of Australian hard coking coal was settled at US$315/t FOB for the reference brand in Queensland, spot prices were a little softer at about US$305/t FOB. A tightening of hard coking coal supply from Canada was likely following rain damage to transport infrastructure, and that served to bolster the price in the coming weeks. The Brazilian steel makers, however, were voicing their difficulties with such high prices for raw materials including coal and iron ore if they have to source these in the international markets.
UK utility buyers were in the spot market seeking around 150kt of thermal coal as prices looked more attractive during the northern summer. There was some surplus coal available in the ARA ports as Dutch coal demand temporarily eased due to an unforeseen shutdown at one of its coal-fired power stations. Asian spot tender activity remained steady, with the
Koreans and Taiwanese back in the market for bituminous and sub-bituminous coal. Indian demand from the power sector as well as general industry was also evident, with South African exporters enjoying further interest in their coal.
By the fourth quarter of 2011, thermal coal spot prices had softened in Asia and the Atlantic markets amid unsettled market conditions, and volatility continued in world financial markets. As coking coal shippers negotiated the price of semi-soft material in Japan, there were further signs of industrial unrest in Queensland outside the BMA mines, which unsettled markets. The major Asian consumers continued to issue tenders for short-term supply of significant tonnage keeping them the most visible players in world thermal coal markets. New social legislation in India was expected to see buyers having to pay more for imported coal as domestic prices rose. This was expected to have an impact on the international market in Asia and elsewhere. Meanwhile, Colombian coal production was once again being disrupted by the wet season which saw heavy rains return since the start of September. Atlantic supply was expected to tighten over the coming months as the wet season continued. Thermal coal spot markets were rather flat in the Atlantic at the time, while Pacific prices softened slightly ahead of Coaltrans in Madrid in late October. Industrial unrest in India was believed to have the potential to lose several million tonnes of domestic coal production, which could put more pressure on the balance. Demand for imports could rise but port and rail capacity was also under pressure. The new carbon tax in Australia continued to cause concern within the coal industry, with predictions of mine closures and job losses emerging. Industry players were also concerned about the impact on competitiveness the tax could have, particularly when newly emerging coal producing countries may not be subject to such costs. Mozambique’s coal resources continue to be tapped with another miner starting exploration.
In the thermal coal spot markets, shippers in the Asian market were expecting a pick up in enquiries from China as the northern winter approached, but spot markets softened in Asia as well as in the Atlantic region. Markets for metallurgical coke
were reported to be lacklustre with little bullish feeling for the foreseeable future.
The view at Coaltrans in Madrid suggested a healthy future for coal in the coming years, at least in terms of demand and firm pricing. While conference speakers represent only a small fraction of the overall number of coal industry professionals, projections of the price of thermal coal in 2012 indicated an average of about US$120/t FOB basis 6,700 kcal/kg GAD (gross air dried). Some traders had even suggested that supply constraints in the future could send the price rapidly back up to around US$200/t FOB same basis. The average price of reference quality hard coking coal was forecast to be around US$265/t FOB in 2012. As 2011 drew to a close, the Asian markets dominated activity, with the Koreans and Indians being most prominent in both the thermal and coking coal sectors. The metallurgical coke market in China remained flat, although there were some reports of a pick up in prices in other supplier countries including India, Japan and Colombia. Coking coal markets outside India were quiet, and spot prices had been softening, but there were signs that the Australian exporters were expecting some new Chinese activity as the year came to an end. The uncertainty over Greek debt continued to impact financial markets, and the fears over other countries in the Eurozone have not helped to boost coal demand.
In late 2011, the fear of a lengthy world economic recession seemed to be the main negative factor potentially affecting coal. We have, however, all seen how unexpected events in the past
few years can impact coal supply suddenly, with supply being tightened and markets rising accordingly. That could happen again, but the impact of environmental and fiscal legislation in supplier countries is also regarded as a hurdle to coal supply by some commentators. The longer-term positive sentiment for coal producers may not be so positive for coal users facing higher costs, and even less for electricity consumers in industry and in the home.