Supply squeeze puts pressure on coal market

MINING accidents and adverse weather conditions are putting the squeeze on already tight international supply, leading desperate coking coal buyers to push spot prices up to US$100/t FOB and beyond, according to Clyde Henderson of Energy Economics.
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Dalrymple Bay Coal Terminal. Courtesy Prime Infrastructure.

Angie Tomlinson

The latest accident to hit the coal industry was the highly publicised derailing of a coal reclaimer at Dalrymple Bay coal terminal on February 15.

According to Henderson, the capacity of Dalrymple Bay is 55.5 million tonnes a year, but the terminal has been running at well below this capacity, with the two new mines in the Dalrymple Bay “catchment” area - Hail Creek and Moorvale - only now ramping up to full production.

There has also been a litany of problems at established mines in the area. In the seven months to January, Dalrymple Bay throughput was only 25.59Mt, which is equivalent to 43.9Mt annualised.

“If we assume the mines in the catchment area are currently capable of supplying coal to DBCT at a rate of 45Mtpa, the lost port throughput will be 2.6Mt over the seven-week period from the time of the accident until 95% of pre-incident capacity is supposed to be restored,” Henderson said.

“One can only imagine the pandemonium that that this will cause in the hard coking coal market, given that panic buying had already set in before the DBCT accident. But once DBCT is back to 95% capacity it should be able to catch up on the lost exports quite quickly, with port capacity being significantly above the short-term output capacity of the mines it services.”

The impact of the Dalrymple Bay accident will be partially offset by mines in the south part of the Dalrymple Bay catchment area, such as Oaky Creek, Gregory/Crinum and, potentially, Kestrel, diverting increased volumes south via the Blackwater rail system to the port of Gladstone.

Underperformance of some mines in the Dalrymple Bay catchment area has also decreased shipping pressure. These mines include Moranbah North and North Goonyella due to tailgate falls and Peak Downs and Coppabella due to pit flooding.

In addition to problems in Queensland and the United States, Henderson said Canadian hard coking coal exports had been disrupted by two snow avalanches onto the railway that links the Elk Valley to Vancouver. The avalanches occurred in January but rail transport volumes only returned to normal in mid-February.

Asian steel producers and coke makers have been panic buying hard coking coal in response to the Chinese net coking coal imports. Japanese steel-makers have been buying US hard coking coal at around US$100/t FOB as cost considerations were thrown out the window in the scramble to secure replacement supply, Henderson said.

“Chinese and Indian companies that have built new coke ovens without securing the necessary coal supply contracts are desperately scouring the globe for hard coking coal. With Chinese coke prices soaring towards US$400/t FOB, those coke makers caught short of hard coking coal are prepared to ay almost any price for coal to ensure that their coke ovens can be operated to capacity,” he said.

Henderson said, putting spot prices aside, the best indication of current prices in this end of the market is Xstrata’s settlement of Oaky Creek coal with the Brazilian steel mills at US$62.00/t FOB. The settlement occurred at the beginning of February, showing a substantial rise in the market since the Japanese steel mills settled at US$57.00/t FOB in December.

Henderson said the surge in steam coal spot prices flattened off in February, but prices remain volatile and the future direction unclear.

“At the end of February unconfirmed reports emerged that Chubu Electric and Coal & Allied had settled the long-term contract price of Warkworth coal at US$41.75/t FOB Newcastle. If correct this would represent an increase of 56%!”

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