As mentioned above, the Newcastle price has fallen sharply over the last two months, falling to USD100/t fob for the first time in 18 months. We view this as the result of a surprising run of mild weather in key coal-producing and coal-consuming regions, resulting in both output and logistics functioning more smoothly than in recent years, while consumption has been weaker than in past years. The result has been oversupplied markets.
Recent market discussion has focused on the impact of low gas prices in the US, and the displacement of coal which has then been exported to Europe, driving ARA prices lower and finally leading Newcastle prices down. We are not convinced by this argument for several reasons. Firstly, the sharp increase in both thermal and metallurgical coal exports in the US occurred in 2010. Henry Hub prices have been falling dramatically for a year. Both of these conditions are well established and do not represent a change in the global coal market.
Of greater interest is the performance of exports in other regions. Thermal coal exports in January and February from South Africa were up 34.3% (3.2mt) and Australia up 20.1% (4.2mt) y-y, the comparisons strong because of the derailment in South Africa and the Australian flooding in January 2011. Columbia exported an additional 2.5mt, as well. By contrast, US thermal coal exports were up just 92kt and met coal exports up 600kt. The good weather that has allowed production and delivery to proceed smoothly has also led to softer demand from consumers. Though Chinese thermal imports were up 18% y-y in January and up 72%, or 16.9mt, in February and global imports rose 11.5% in January, demand appears to have softened, resulting in a glut.
We expect the market to tighten as we come into the peak demand season, but also because some of the new coal coming into the market is not viable at current prices. At USD110/t cif to China (the current QHD price) 30% of US and 5% of Columbian product is not viable, while at USD96/t cif to Europe (current ARA), 40% of US coal and 35% of Columbian coal is no longer profitable. We expect the decline in Newcastle prices to reverse later in 2Q12.
