As the Japanese utility tenders for steaming coal start, so too begins an interesting phase in how coal is traded internationally.
While the disparity between spot and benchmark prices for steaming coal remains a feature of coal trading, the days of benchmark pricing seem numbered. Clyde Henderson of AME Mineral Economics said Japanese utilities were increasingly moving to spot tenders and away from high volume, long-term contracts, which would see the further decline of the benchmark system. "Over the counter" trade is expected to gain momentum.
In the Japanese Financial Year 2000, the Japanese utility reference steam coal price fell to its lowest level ever of US$28.75 per tonne while spot prices in the Asian utility market are currently near record lows. At present, the FOB utility price out of Queensland is around $A20 and for New South Wales around $A19 Henderson said, which had subdued production.
"Producers are no longer simply producing their way out of trouble," Henderson said, referring to past strategies of producing volume regardless of pricing.
Despite the appearance of rising European spot prices as opposed to stagnant Asian spot prices, Henderson said price rises in Europe do not necessarily indicate improving market fundamentals but they do indicate Australian coal is still needed on the European market which therefore suggests the overcapacity in the Asian rim has been mopped up.
In the medium term AME predicts a price recovery as strong growth in demand and a pause in greenfields mine commissioning erode the overcapacity situation. But, AME warns, factors limiting the upside potential for international steam coal prices include low barriers to new entrants, the rapid growth of Chinese exports and the continuing decline in production costs.
"Demand for internationally traded steam coal is set to grow strongly over the next five years with steam coal imports forecast to increase by 116 Mt (32%) between 1999 and 2004," Henderson said.
In Europe steam coal imports will continue growing as domestic European coal production declines. Australian producers are reportedly targeting Europe on the back of the weak Australian dollar. Countries such as Spain and France where coal usage is linked to rainfall and oil and gas prices, are being targeted. German demand will also grow strongly. But waiting in the wings are other producing countries including South Africa, China, Venezuela and Colombia which will be eyeing these markets out too.
"The fundamentals are good in the medium term," Henderson said, "and that is a recipe for price rises. The two flies in the ointment are the reduction in the Australian dollar and China."
As China flexes its muscles it is emerging as a swing producer, replacing the United States in this role. The ability of the United States to absolutely move the market appears over for now after falling from its position as the world’s second largest coal exporter in 1998 to the fourth largest in 1999. China is likely to emerge as the new swing producer because, like the US, China’s domestic coal market exceeds its exports by an order of magnitude.
China’s exports increased to 37.4 Mt in 1999, up 16% and in time China is expected to influence market dynamics. According to Henderson, official government targets for Chinese exports in 2000 have recently been downgraded from 50 Mt to 43 Mt.
"Assuming the Australian dollar recovers over the next six months, we see the potential for utility spot prices to increase to US$25/t FOB Newcastle – but there will be considerable spot price volatility through 2000," Henderson said.
Meanwhile, Joint Coal Board chief Ian Farrar has forecast that coal sales will be increasingly carried out through screen trading which would increase competition among producers. The development would also collapse the current disparity between contract prices and spot prices, he said.
European based groups such as Spectron Global Coal have already made bids to enter this market with varying success. Through its internet portal, the company acts as a conduit for collecting bids and offers from coal buyers and sellers wishing to buy and sell coal against the SECA. Spectron said similar standardised agreements were the basis for the sale and purchase of over 100 million US tons of coal during 1999. Just last month, the Noble Group Limited and IBM China/Hong Kong Limited agreed to create an online marketplace for raw materials trading. The companies said RawMart.com would link buyers and sellers in the raw materials markets with over 500 products around the world.
A trader at a major Australian coal producer commented that his company and many other Australian companies had trialed screen trading to sell coal, with limited success. He said that particularly in the Asia-Pacific screen trading had limited applicability in the foreseeable future because of the importance placed on the key relationship between buyer and seller. He said to his knowledge no company in Japan was buying coal on-line. Although he said he would not be surprised is progressive companies such as Tokyo Electric were looking into screen trading.