coal markets squeeze producers
IT WAS, AS THE OLD SONG SAYS, TOO HOT not to cool down. In just a few years, coal prices tripled, pinching energy and industrial users worldwide. Globally, coal prices peaked in late 2004 and began to slowly settle downward in 2005. But in 2004–05, volatile and soaring prices of natural gas, oil, and electricity competitively advantaged coal, despite its high price. Overheated economies demanded steel, keeping the metallurgical coal market in the price stratosphere. But that market, too, had begun to cool by the middle of this year.
The question for 2006 is whether high energy prices will hobble economic growth (sending coal demand and prices tumbling down the cyclical slope) or moderate enough to keep economic growth and demand healthy, ensuring a soft landing for coal prices. Answering that question is complicated by the supply question: Will producers, who have been opening new mines and expanding old ones as prices rose, increase supply enough to drop coal prices, regardless of the cost of competing fuels?
For the steam coal market, the picture is not uniform worldwide. The U.S. market remains sufficiently isolated by geography and aging transport systems that its dynamics differ somewhat from those of the larger international market. Non-U.S. spot prices peaked in late 2004 at near $80 per metric ton (mt) delivered into Northwest Europe (or CIF ARA). The rise was fueled by China's red-hot growth, which sopped up both coal and freight capacity. South African coal priced at the Richards Bay port was running in the mid-$50s/mt, and Colombian cargoes were still being offered at over $60/mt, plus delivery. From late 2003 to mid-2004, some spot dry bulk freight rates quintupled; by the end of 2004, freight was still adding $20/mt to a typical European cargo.
In the Asia-Pacific market, a similar pattern prevailed, with steam coal at major Australian, Indonesian, and Chinese ports priced over $50/mt and freights of $15 to $20/mt into Japan and Korea, the largest coal-importing countries. Freights from Australia to Europe were quoted at virtually prohibitive levels, around $30/mt.
Through 2005, those spot prices have backed off, but slowly, for both freight and coal. Only in late July did Richards Bay coal sink below $50/mt, and by October freights into Europe were still running at $15/mt. In Asia-Pacific, coal from Newcastle, the benchmark Australian port, was dropping below $45/mt, and freights to Japan were in the $10 to $12/mt range.
The past three years' volatility has provoked opposing reactions among international coal market players. Whereas some of the biggest producers and consumers have turned to hedging more risks in coal and in freight through increasingly sophisticated derivatives, many consumers have retreated to the risk management tool they know best: the long-term contract. That has left international paper markets dependent on what's widely termed "sentiment"—player opinion. And that sentiment has been based on thin trading in small spot cargoes that may represent the market, or that could reflect distress or other nonreplicable transactions. Beginning in thin periods in 2004, there were complaints that market valuation had become a circular process, with indexes based on transactions that themselves were based on indexes. By late 2005, there was open speculation among market players about which (if any) deals of the few known really reflected the state of the market.
Derivatives in international coal trading only took off—and in a limited fashion—in 2002, when market players, assured a transaction-based methodology was in place for index components, began to use the TFS API #2. An average of weekly market assessments by two publishers (Argus and McCloskey), the API #2 gives one benchmark for 6,000 kcal/kg (10,800 Btu/lb) 1% sulfur coal CIF ARA. Paper trading in CIF ARA was estimated at three times the underlying physical market in 2004, with some traders using the API #2 to hedge transactions out several years. It was by then an open secret that the transaction-based methodology wasn't in strict use, but by then it didn't matter; deals were being done using the API #2.
But attempts to extend derivatives to the Pacific market have met with no success, in no small part because some major participants were burned in the spot market during the enormous volatility of 2003–04. Many of them retreated to term contracts, but they have also been seeking a reliable index to use in multiyear contracts. The last number to achieve Pacific market consensus—the Japanese utility annual contract price—no longer exists.
indonesian coal at +$60/mt to india
India’s state-owned trading agency, MMTC Ltd, has awarded contracts for between 1.5 million and 3 million mt of Indonesian steam coal over two years at a reported price of a little over $60/mt C&F. The final quantity is still to be determined. For MMTC, this has been one of its single biggest tenders. The supply will be arranged by Adani Exports Ltd (AEL). The coal has to have a gross calorific value of 6,300 kcal/kg, ash content of 10% and total moisture of 15%. It will be sourced from Indonesia.
Alongside this tender, a public sector power utility, Gujarat Electricity Board (GEB), had also entered the market for 1.3 million mt of power-grade coal. This is its full requirement for the FY07 (ending March 2007). The coal will be fed into three GEB plants. Four parties reportedly have submitted bids which closed on Thursday. They were Coal and Oil, MMTC, Swiss Singapore, and Bhatia International. The coal must have a net calorific value of 5,500 kcal/kg.
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coal price assessment
FOB Qinhuangdao (6,200 kcal/kg)
FOB Kalimantan (6,300 kcal/kg)
FOB Kalimantan (5,200 kcal/kg)
Russia Pacific (6,300 kcal/kg)
CIF Japan (basket price)
CIF Korea West (6,080 kcal/kg)