While the first half of 2004 was notable for extremely tight Pacific Rim steam coal markets, the second half looks like it will be dominated by a shift in the focus of supply deficits to the Atlantic Basin. Trade flows will reverse, with the shortlived revival of South African spot sales into East Asia halted in its tracks, and increased sales by Pacific producers into Europe likely. Richards Bay spot prices appear to have some way to run and could break through US$70/t FOB during July.
Price indicators are certainly still very strong, with Glencore having apparently just sold coal on spot to Mexican utility CFE for somewhat under US$70/t FOB Newcastle. Mexican coal imports were down 65% in the first two months of the year, presumably as CFE waited for a fall in prices that never eventuated. Chinese suppliers have also finally settled contract prices for 2004 deliveries to the Korean utilities at US$55.63/t FOB (basis 5,900 kcal/kg N.A.R), which represents an increase of 90% over 2003. The Korean settlement is some US$6/t higher, after energy adjustment, than the price the Chinese settled with the Japanese utilities in April of US$48.30/t FOB (basis 5,800 kcal/kg N.A.R).
On the other hand, the Japanese nuclear crisis is all but over, lowering expectations of Japanese demand growth. Japanese utility coal consumption fell by a provisional 5.5% in April compared with April 2003. This was the first y-o-y monthly fall in Japanese utility coal consumption since April 2002 (a few months before the nuclear crisis hit). In the four months to April Japanese utility coal burn was still up, but only by 1.4%.
Spot steam coal prices of US$60/t plus are unsustainable over the long term, but the increased tightness in the European market makes it more difficult now to predict whether spot prices will begin to track downward this year or next. Even when spot prices do eventually fall, they will likely remain substantially higher than historical averages out through 2005, supported by high oil and gas prices and strong world economic growth. It certainly looks like there will be another rise in Japanese contract steam coal prices next year.
Turning to coking coal markets, Australian exports of metallurgical coal hit a record level of 10.5Mt in April, compared with only 8.8Mt in March and 8.1Mt in February. The increase in metallurgical coal exports was due to the improved performance of the Newcastle coal chain and a recovery in Queensland exports after the rash of longwall outages and wet season disruptions that marked the first three months of the year.
Nevertheless, the hard coking coal market remains very tight, with Australian producers reporting little letup in the deluge of enquires from potential buyers, mainly from Indian and Chinese steel mills and coke makers. On the supply side, BHP Billiton’s West Cliff colliery has suffered another production outage due to serious roof control issues, but Anglo’s Moranbah North mine recommenced longwall mining around 14 June after its five-month outage.
Also, Austral’s Tahmoor commenced production with its new high capacity longwall on 31 May, although production to date has been constrained by software glitches in the longwall operating systems. The resumption of longwall production from Moranbah North and Tahmoor, combined with BHP Billiton’s 5 Mtpy hike in coal production beginning to kick in, should see an easing of the overheated hard coking coal market over the next few months.