The average price hit A$64.40/t in August, up a hefty A$7.83 from A$56.57 in July. In US dollar terms the average price increased from US$40.47 to US45.73.

The increase in the average price was due to the shipping of spot tonnages contracted a few months earlier, when spot prices were above US$60/t. Specifically, between late May and early July there was a surge of spot transactions for August delivery at prices ranging from US$60.00 to US$62.00/t.

With spot prices so high the real surprise is not that the average export price finally broke above the utility contract price in August but why it didn’t happen earlier, in June or July, and why average prices aren’t even higher than they are now? In July, for example, the average price of steam coal exported to Japan was US$40.47/t, which was US$4.53/t below the utility contract price of US$45.00/t FOB, despite spot prices rising towards US$60/t FOB at that time.

It is usual for the average export price to take some months from the beginning of the new Japanese fiscal year on 1 April to ramp towards the contract price. This is because of the impact of carry-over tonnage – tonnage contracted for, but not delivered in, the previous fiscal year. This tonnage is delivered at the start of the new fiscal year, but at last year’s price. Usually the impact of carry-over tonnage is limited to the first few months of the fiscal year, and the volume of carry-over tonnage out of NSW is understood to have been less than usual this year. So carry-over tonnage seems unlikely to have significantly impacted export prices over the last few months.

Prior to JFY 2003 it was usual for the average price to stall well below the headline utility contract price (the ‘reference price’) because at that time contract prices were discounted to levels well below the ‘reference price’. But in JFY 2003 most of the discounting was removed, and it is our understanding that this year there is practically no discounting at all.

So if average export prices to Japan are not being held down by carry-over tonnage or discounting of annual utility contract prices, then what is the cause? Certainly sales of lower quality coal and other lower priced contracts to non-utility Japanese customers drags down the average steam coal export price to Japan, and one can only assume that there were a disproportionate number of such sales in June and July. But the volumes and prices of such sales are not enough to fully explain the low average prices.

It would seem that the main reason for lower than expected average export prices to Japan is the impact of calendar year 2004 contracts. These were settled prior to the main JFY settlements and at substantially lower prices. An example is the Coal & Allied settlement with Chubu Electric in late 2003 for delivery of Warkworth coal over calendar 2004 at US$41.75/t FOB. We understand that this contract alone covers about a million tonnes of steam coal out of a total of around 33 Mtpy of NSW steam coal exports.

From the above we can have a good stab at forecasting where the average NSW export steam price to Japan will head over the next six months. While spot prices for September delivery stayed high, the total tonnage of spot sales appeared to be lower than for August delivery, so the average export price for September should decline slightly from the August peak.

The average price of steam coal exported from New South Wales to Japan is likely to fall back towards US$40/t in the December quarter, as the impact of falling spot prices flows through into export prices.

The average price should then bounce back in early 2005, after the low priced calendar year 2004 deals expire. If calendar year 2005 contract prices end up at around US$50/t, the average export price to Japan should jump back up to over US$45/t for the March 2005 quarter.

Steam Coal Spot Prices Track Down

Steam coal spot prices are currently retreating in an orderly manner, much as expected. Spot prices out of Newcastle eased slightly to US$55.00/t in mid September, while Richards Bay prices fell more sharply to US$58.00/t. It is interesting that Richards Bay prices continued to fall despite European electricity utilities commencing buying for the peak winter demand season, but transactions during October will provide a better indication of the direction of the Richards bay spot market as buying for the European winter gears up.

Hard Coking Coal Price Level Murky

The hard coking coal market remains strong but the exact levels of pricing are pretty murky at present, with few clear and reliable price signals of late. A report on ILN, quoting McCloskey, has it that BHP Billiton recently sold 300,000t of hard coking coal on spot to Indian steel producer SAIL at around US$105/t. But a source in SAIL’s Coal Import Group denies that it has purchased any hard coking coal on spot from BHPB. Sources at BHP Billiton were unavailable to throw some light on this contradicting information. SAIL of course buys about 3 Mtpy of coking coal from BHP Billiton on term contract.

SAIL solicited bids for an unspecified quantity of hard coking coal in June (tender HCC/2004-05/1, which closed 14 June 2004), but didn’t buy any of the coal offered because the prices were considered to be too high. SAIL instead purchased hard coking coal of United States origin.

Japanese Contract Price Forecasts

With steam coal spot prices tracking downward as expected Energy Economics’ forecasts for JFY 2005 long-term contracts remain unchanged. The estimate for the Goonyella hard coking coal price for the current fiscal year has, however, been adjusted down from US$57.25 to US$57.00 on advice that the price is lower than earlier thought.

August Temperatures Close to Normal

During this year’s and last year’s northern summers we have become accustomed to regular heatwaves in Europe and in East Asia pushing up coal demand as electricity generation surges to cope with increased air conditioning usage. Last month the main temperature anomaly in a coal-importing region was, for a change, a cold snap. Temperatures in the inland parts of North America fell to around two degrees below normal in August, which most likely suppressed coal demand in the United States.

Most parts of Japan returned to normal temperatures in August after a very hot period through June and July, although the southern island of Kyushu remained a little warmer than usual. Temperatures in northern Europe were significantly hotter than normal, but temperatures in southern Europe, where air conditioning is a more important component of electricity demand, remained close to normal.