The picture is similar in the hard coking coal market, with Xstrata belatedly settling this year’s contract prices with SAIL in mid July at US$107/t FOB, which is around 87% higher than the current Goonyella benchmark price into Japan of ca. US$57.25/t (Although reports of Nippon Steel re-selling US coking coal to India at US$80/t paint a very different picture).
Spot steam coal prices ex Richards Bay broached US$70/t as predicted in late June, with a deal done on globalCOAL at US$73.00/t on 24 June and one at US$70.00/t on 30 June. But prices quickly eased back below the US$70/t mark and fell sharply to US$63.7/t by the end of July. Mark the US$73.00/t Richards Bay price in your memory – it may be a price not reached again in our lifetimes. The fall in Richards Bay spot prices resulted from a much improved South African railing and shipping performance after the series of train derailments earlier in the year.
Newcastle spot prices have tracked sideways rather than falling, mainly due to restricted throughput by the Newcastle coal chain in June and July and high summer temperatures in Japan, but more of that later.
The tightness in both coking and steam coal markets is expected to ease over the remainder of the year, but spot prices are still expected to end the year considerably above contract prices. Annual contract prices are therefore forecast to rise substantially for all coal types.
Turning to a shorter term viewpoint, steam coal demand at this time of year is of course markedly affected by summer temperatures in the northern hemisphere. In Japan, electricity generation increased sharply in June due to higher than normal temperatures. Electricity generated and purchased by the ten major regional utilities was 6.5% higher than in June 2003.
Temperatures were around two degrees above normal in northern Japan during June, and long range forecasts by the Japan Meteorological Agency indicate a 40 to 50% chance of higher than normal temperatures across Japan over the three months to September, with the odds of normal temperatures estimated at 30% to 40% and of below normal temperatures at only 20%.
But coal consumption by the ten major regional utilities actually fell in June despite the sharp rise in electricity generation. Coal burn fell to 3.620 Mt, down 5.1% from 3.815 Mt in June 2003. The subdued coal consumption can be firmly attributed to the resolution of the Japanese nuclear crisis.
June consumption data is not yet available for the remainder of the Japanese electricity utilities, but data to May for all of the utilities also throws into stark relief the impact of the recovery in nuclear generation. Coal consumption by all of the Japanese electricity utilities was up only 0.9% to 29.7 Mt in the five months to May; with reasonably robust growth in the March quarter being eroded by y-o-y declines in April and May of 5.5% and 4.9% respectively.
April and May are typically the months with the lowest electricity demand in Japan. It is during these low demand months that nuclear units, which are run as absolute base-load generators, tend to exert the greatest impact on coal consumption Coal consumption by the Japanese utilities is likely to be quite flat over the next few years, with the negative impact of the increased nuclear plant availability being counterbalanced by forecast strong economic growth, the commissioning of a couple of new coal-fired units and, over the short term, by the expected high summer temperatures.
Tokyo Electric’s 600 MW Hirono #5 coal-fired unit went into commercial operation on 12 July and Kansai Electric is due to commence commercial operations at its 900 MW Maizuru #1 unit in August. But there is then a huge gap of four years until the next new coal-fired unit is commissioned by a Japanese utility. Chugoku Electric’s 250 MW Osaki #1-2 is slated to commence commercial operations in December 2008.
Japanese steam coal imports are yet to truly reflect the impact of the increased nuclear plant availability, because the utilities took advantage of the reduced coal burn in April and May to rebuild inventories. By the end of May utility coal inventories had increased to a provisional 7.041 Mt, which was the highest level since August 2003 and well above the 4.988 recorded at the end of March. With re-stocking complete, flat imports by the Japanese utilities over the second half of the year will tend to drag down spot prices in the Pacific Rim market, so long as there is no major downturn in Chinese steam coal exports.
June temperatures were also higher than normal in southwest Europe (United Kingdom, France, Spain and Portugal), although anecdotal evidence indicates July temperatures have been closer to normal. A repeat of last year’s extreme heatwave in Europe looks unlikely this summer.
Elsewhere, the zone of high temperatures that affected Japan extended westward in a narrow band up through central China and into western Siberia. This is likely to have boosted Chinese electricity demand and coal consumption during June. Nevertheless, Chinese utility coal inventories recovered during June according to Bloomberg reports. So the jury is still out on whether China can continue to maintain steam coal exports over the rest of summer.
The hard coking coal market will be extremely interesting to observe through the second half of 2004, with substantial additional supply flowing from Australia, Canada and the United States.
Australian hard coking coal exports were down 2% in the first half, but the fruits of the BMA output expansion are starting to flow through, Hail Creek has hit its straps, and Moranbah North and Tahmoor are back in production.
The extreme tightness in the hard coking coal market will surely ease, but the question remains as to whether the additional supply will be enough to balance demand and supply by the end of the year. Theoretically the answer should be yes, but based on recent performance it would be remarkable if we got through the remainder of the year without another substantial supply disruption, whether its another major longwall mine outage or port incident, which would throw the market back into disarray.