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Thermal coal prices touch record highs

by Arnab Mallick

June 27, 2008: Global thermal coal spot prices touched record high levels this June after National Development and Reform Commission (NDRC) of China announced the price control.

In order to meet brisk demand for electricity in the domestic market, Chinese government announced the enforcement of such policies as setting the sales price of thermal coal at the highest contract price on June 19 as higher limit and prohibiting price hike of thermal coal for half years from June 19, 2008 to December 31 and raising electricity prices by 0.025 yuan per kWh.

The spot prices of both Australian and South African markets have soared since Chinese government announced the above policy on June 20.

The selling price has risen particularly at the Austrian market (loaded at Newcastle). The selling price on June 23 reached $185.00, soaring by $15.50 compared with the previous day. On the other hand, no change has been seen in the buying price. The price on June 23 increased $1.00 to $159.00.

At the South African market, both the selling and buying prices have soared. The selling price on June 23 increased $5.00 to $161.00 compared with the previous day. On the other hand, the buying price soared to $146.00, increasing by $11.00 from the previous day.

Due to historically soaring coal price, the suppliers in China could possibly shy away from selling coal with limit on the price in the domestic market. Subsequently, the demand and supply of thermal coal in China could possibly get stringent. If so, coal imports in China would increase, which could contribute to further tight demand and supply of thermal coal in Asian area.

In addition to the concern over whether Chinese government issued Export License for coal or not, worrying factors have added to the demand and supply of thermal coal in Asian market, which has further tightened thermal coal markets both in Australia and South Africa.


There has been uninterrupted rise in thermal coal price since April 4 when the index was at 119.59 levels. Since then, price has just been on the rise. During May, globalCOAL NEWC index appreciated by more than 14 percent. According to the index, global thermal coal price touched $ 151.7 per ton for the week ended May 30.

globalCOAL NEWC index

2-May-08 133
9-May-08 133.63
16-May-08 134.85
23-May-08 138.35
30-May-08 151.7
6-Jun-08 158.53
13-Jun-08 160.23
20-Jun-08 162.66


This trend continued even further and touched record level of $162.66 per ton for the week ended June 20.

Rio Tinto Group said that coal prices are likely to go up in future all through next year on the back of robust demand.
According to available reports, thermal coal for delivery in northwest Europe rose to a record $175 a ton during the second week of June, as railroad and port bottlenecks in Australia and South Africa limited supply and demand rose.
It has been reported that major miners including Rio Tinto, Xstrata Plc and BHP Billiton are seeking to expand capacity at Australia's Newcastle port. It has been learnt that shipments from the port in the week ended May 26 fell by 18 percent (w-o-w) and vessel queue rose once again to 39. The market is in a real tight scenario with tremendous summer demand emerging from the Asian markets.
Meanwhile, on June 4, the port had to stop ships from entering as a storm battered the New South Wales state coast, and this gave the final boost to the already rising thermal coal price to touch record highs.
But on a whole, infrastructure to support export at Newcastle port, the world's largest coal export-harbour is far from a normal state at the moment. And global market is only seen to remain very tight in the medium term.
In addition to the severe infrastructure bottleneck in Australia, the coal supply scenario in South Africa is also severely alarming. There are severe apprehensions that South Africa, the biggest supplier of steam coal to the European market, may not be able to meet the full demand of European Union and EU would be forced to buy coal from Australia or Indonesia that would lead to further increase in prices.
It has been reported in the media that South Africa is developing a strategy that may limit shipments to help ease a domestic power crisis. Any cut in coal exports from South Africa will result in European consumers seeking volumes elsewhere, mainly Indonesia and Australia and this would further tighten the market.
Along with the Chinese buyer, the demand from Indian buyers is also very strong at the moment. Indian buyers, who have been trying to get into long term contract with global suppliers have been failing as suppliers are becoming unwilling to get into a contract when the market is very tight and prices are soaring at such a fast pace. This is making things worse on the domestic front as well.
Meanwhile, it has been learnt that Indonesia, a major coal producing nation, is seeking to enter into such type of long term contract wherein it will be in a position to benefit from any increase in the spot prices.
Simon Sembiring, director general of Coal and Mineral Resources at the ministry, has told media representatives that, "Existing sales contracts take account of annual price changes and ``that's not fair and don't reflect global market prices,'' which can change anytime."
According to him, the government expects mining companies in Indonesia to produce 261.61 million tons of coal next year which is more than the estimated 232 million tons this year. In the meantime, domestic coal consumption may touch 75.4 million tons in 2009 from 52.6 million tons this year, he noted.
The globalCOAL RB index showed significant increase during May as well.
RB Index

2-May-08 110.82
9-May-08 113.18
16-May-08 113.53
23-May-08 121.06
30-May-08 133.4
6-Jun-08 130.15
13-Jun-08 136.47
20-Jun-08 144


Chart: RB Chart

Outlook

The global coal market just does not seem to go right. The infrastructure bottlenecks in Australia have been heating the market for several months now. On the other hand, global demand for thermal coal is robust. It became even strong with summer setting in Asia that created huge amount of coal for emerging markets in Asia, including India.

It is estimated that supply growth in China will be insufficient to keep up to the growing demand. This will further add to the existing tightness in the market. Consequently, the upward pressure on the global thermal coal price will continue to persist over the next two month, at least.

In the short term, there is no sign of the market cooling down. It would surely be tough for the suppliers to sustain such high levels in immediate future and there might be some easing against last few weeks. But market shall remain tight and price would sustain at relatively much high levels.

Source: Coal Insights