The stock market crash almost a year ago, and the accompanying slump in commodity demand, led to a very different situation in the European coal market than had been expected before those events occurred. Nevertheless, the coal industry has continued its activities through the difficult times and during the past few months there have been some signs of stabilization and improvement.
European thermal coal trade is forecast to reach 149.0mt (million tonnes) this year, which is a decrease of 26.1mt
compared with last year’s total of 175.1mt. Of this total, 54.2mt is expected to be supplied by Russia which is decreasing its volume by some 3.9mt compared with that recorded last year. Russia remains the main exporter of thermal coal in Europe. South Africa is still the second largest supplier of thermal coal to the European market, but now only just with a total of 27.7mt forecast to be shipped there this year compared with 27.5mt from Colombia. South African exports to Europe have almost halved in the past four years or so. Indonesia retains its position as Europe’s fourth largest supplier with 17.5mt expected to be shipped this year which is only 0.2mt less than in 2008. Europe’s total thermal coal trade of 149mt in 2009 compares with 422.2mt expected in Asia, and 108.5mt in the rest of the world.  European thermal coal trade now constitutes 21.9% of world thermal coal trade, and is currently forecast to decrease slowly while the growth in Asia continues in the next few years.
Amid the recession, further consolidation of the coal industry is a likelihood with the major miners still looking at opportunities on a regular basis. One approach was reported with Xstrata making a merger proposal with Anglo American. While the stability of the economic situation remained unclear, in the steel sector, further cost cutting exercises were announced in Europe in June. In May, there appeared to be a large amount of ‘flex’ in the thermal coal market, at least in the Atlantic market. The minimal impact on price that was noted previously, when the Colombian industry experienced the disruptions due to industrial action was an indication that such events were having little impact. This suggested that new demand had been so much lower than usual, that a disruption of this type could be absorbed rather readily. A restriction in supply of some 2.5mt over the previous couple of months would have had much more serious effects during periods of high demand, but not during the second quarter of 2009. The adjustment in output by the coking coal shippers was in part responsible for the relatively firm contract price achieved this year amid the slump in the steel markets. Meanwhile, consumers continue to be observed in the market, looking for acquisitions at a bargain price due to the economic downturn.
Colombia’s exporters to Europe have been facing a freight disadvantage with their South African competitors for several months now (see chart), and the FOB (free on board) price of their coal has been softer. Reports are now emerging that some of the coal being offered for delivery in the prompt spot market is of a lower quality, with higher sulphur content and lower CV. The Colombian exporters may be keeping the better quality product in reserve until the market adjusts to their more usual FOB price premium to their Atlantic competitors. Interestingly, it was noted in August that Capesize freight from Indonesia to Rotterdam was cheaper than from Colombia to Rotterdam, and this has been the case since May. Back in March there was widespread disruption of Colombian coal supply as strike action spread across the industry. As a consequence, South African and Russian shippers were being approached by European consumers anxious about the possible delays to deliveries, or even cancellations. Reports at that time, however, indicated that stocks of coal at EMO in Rotterdam were relatively high at around the 3mt level.

At the time of writing there is a more general view that demand has eased after the summer flurry, with China currently looking to drive down prices in the Asian market which could have an impact on the global markets. To counter this on the supply side, there are reports that Russian supply is much tighter, with no export coal available from Suek for new deliveries for the rest of 2009. Severe congestion has been reported on the rail system to the Pacific ports. This situation appears to be due to the volume of export products rather than freezing weather, which has been the usual cause of disruption in the past. Total exports of coal during the first half of 2009 reached 44.7mt which was a decrease of 6.9% compared to last year. During early summer, as Atlantic freight rates had been rising, there had been reports of European buyers seeking more Russian thermal coal than they had been prior to that time. The shippers had been offering significant tonnage amid a rising spot price, but this had begun to soften and the buyers were more interested. Unconfirmed reports suggest several deals had been done for delivery during the summer months at a price of about US$67.00/t FOB basis 6,000 kcal/kg NAR (net as received). During the first quarter of the year, further indications of the reduction in coal production during Q1 2009 were received. This time, Raspadskaya reported a decrease of 35% to reach 1.886mt compared to the same period in 2008. Exports contributed 337kt to the sales total of 1.3mt which was a decrease of 63% compared to Q1 2008. The domestic market took about 75% of production during January to March this year. Russia enjoyed the bumper year in 2008, with SUEK reporting production of 96.2mt which was an increase of 5.8% compared to 2007. Exports rose by 9.3% to reach 28.2mt. In March, the latest major player to have announced a reduction in output was Severstal, with coal and steel being impacted this year. Up to 18,000 jobs were likely to be lost, indicating that one in five workers would be affected by the downturn. Russia’s Kuzbassrazrezugol exported 5.87mt of coal during Q1 2009 which was 0.88mt or 13% less than during the same period in 2008. In Ukraine, imports of coking coal were reported to have decreased to 1.58mt during Q1 2009. This was a decrease of 51% compared with the same period last year. As coal producers adjusted their output to meet reduced demand, data in April on the Russian coal industry indicate that their exports also decreased during the first quarter of this year. A total of 22.05mt was reported, which was a decrease of 9.9% compared with the same period in 2008.
 European buyers have noted that South African shippers and traders were seeing steady business from Indian consumers as spot prices hovered around the US$60.00/t FOB level. There could be as much as 20mt delivered to the sub-continent this year as India continues to grow in importance for the exporters. By mid-August, a number of European consumers were reported to have built high stocks of coal at their plant over the previous few weeks, with some suggesting they would not be needing additional tonnage for several months. This could see some spot opportunities diminish until later in the final quarter of 2009, particularly in the Iberian markets. There have been reports that Polish producers have substantial stocks of coal at present, but they feel it is more cost-effective to import Russian tonnage for their domestic market. With the delivered costs being taken into account, and with freight from competitor countries being higher, the Russians and Polish miners are able to maintain their firmer FOB prices as reflected in the spot prices shown in the charts. Poland’s thermal coal exports decreased by 36% in Q1 2009 compared with the same quarter in 2008, to reach only 1.07mt as German demand decreased substantially to only 627kt. Coking coal exports reached only 165kt during the quarter which was a decrease of 37kt compared with Q1 2008.
Despite the economic situation there has been plenty of development in the coal industry, and some of this has been seen in Europe. In the United Kingdom, expanding Welsh anthracite producer, Energybuild PLC, has reported an agreement for a loan of £2.5m with its major shareholder Western Canadian Coal Corp. The money will be used to fund ongoing development of the company’s mines. The company has an estimated recoverable inferred coal resource of 36.2mt near Port Talbot. Energybuild announced its interim results for the six months ended 31 December 2008 when gross profit was £1.689m due to higher production volumes of 65kt, and compares with a loss of £0.113m in the same period in 2007. Revenue increased to £9.550m compared to £1.445m in the same period in 2007. Operating profit was £1.046m compared to an operating loss of £0.739m in the same period in 2007. The company is understood to be looking at increasing export tonnage as output is ramped up over the coming years. With regard to a possible recovery in the coking coal sector, the steel industry has been somewhat encouraged by news that car sales in the European Union increased year-on-year in June for the first time since the sharp decline began in May last year.
There had been more enquiries for metallurgical coke and hard coking coal, with spot prices for the latter having firmed during the course of July. There continues to be uncertainty in the markets, however, and while the bottom may have been reached, it is unclear exactly when a sustained recovery is likely. In early July, Eurofer was expecting a decrease of 30% in imports of steel products by the European Union this year compared to 2008. In 2010 there could be a recovery of around 15% if the economic situation improves.

During July, coal stocks at power stations in Europe were reported to be well above average levels which concerned a number of shippers looking ahead a few months. Rates in the freight market had fallen in general, with the only firming on a major coal route being seen for the Richards Bay–Rotterdam trip. The differential between this route and the Bolivar–Rotterdam one had narrowed to US$2.00/t but with the latter still more expensive than the longer trip from South Africa to northwest Europe. There could be some positive developments for the Colombian coal producers if the trend continued and their delivered costs become more competitive, potentially enabling them to increase their FOB prices further in the Atlantic spot markets after several months of unfavourable freight rates. The European spot market was very thin as the holiday month of August loomed, with a number of buyers expected to be on leave in the following weeks amid high stock levels.
In July, Colombian shippers reported interest from the Mediterranean market for supplies starting in 2012 as additional
coal is expected to be required by a utility then. Contract prices for negotiation are understood to have been mooted by
the producers and traders in the region of US$80.00/t FOB basis 6,000 kcal/kg NAR.
Russian exporters said Iberdrola was seeking a Panamax cargo of coal for delivery in October. At the time the prompt spot price of Russian material into northern Europe was around US$68.00/t FOB basis 6,700 kcal/kg GAD (gross air dried), and the Spanish buyers would be expected to seek a small discount from that due to their slightly higher freight cost. There have been offers of Illinois Basin thermal coal in the northwest Europe market during June. Prices are believed to have been around US$70.00/t CIF adjusted to 6,000 kcal/kg NAR. At that time this would have generated interest from utility buyers as the price was competitive with Colombian tonnage.
In September in Croatia, eight Panamax cargoes of coal are being sought for the Plomin power station, for delivery during November to May. In that region, although a limited player in the international seaborne thermal coal market, there has been areport of a substantial tender being issued for hard coking coal in Bosnia–Herzegovina. Up to 790kt of material is understoodto be required for delivery starting in October, with specific requirements for 80kt of high vol Australian product, 280kt ofmid vol US material, 280kt of mid vol Australian coal, and 150kt of low-vol Canadian coal. Offers are required on a delivered basis to the Croatian port of Ploce.
In South Africa there has been intermittent activity in the prompt spot market at the time of writing, with shippers looking for around US$61.00/t FOB basis 6,000 kcal/kg NAR for delivery in October in Panamax-size quantities. The price for November is about a dollar per tonne higher, with the spread at around 50 cents to one dollar as buyers look to pay around US$61.00–61.50/t FOB. The prompt spot market had softened a little before that, with a Panamax cargo sold to a European customer for US$63.00/t FOB basis 6,000 kcal/kg NAR. Delivery is required in November. Another Panamax cargo was sold for US$62.00/t FOB same basis and also for delivery in November. Buyers appeared to be looking to pay closer to US$60.00/t FOB basis 6,000 kcal/kg NAR, although no deals had been confirmed at that level. In late August, a 75kt cargo of coal was reported sold for US$66.00/t FOB basis 6,000 kcal/kg NAR. Delivery is required in November. A Panamax cargo was also reported sold for US$65.50/t FOB same basis and loading in November.

Back in May, Brazil’s Usiminas is rumoured to have purchased 48kt of Ukrainian anthracite through Bulk Trading at a price of around US$75.00/t CIF. This is a surprisingly low price for anthracite, which nets back to the high US$50s per tonne FOB.  Offers from other major traders are believed to have been some
US$20.00/t FOB higher.
Early in the year, market rumours suggested there was increasing interest in petcoke from some coal consumers as the price had been decreasing. Some suggested that buyers had been negotiating with US shippers for a price of about US$10.00/t FOB or even less for deliveries in 2009. Both E.ON and Drax had been mentioned as looking to take around 400–500kt each this year. The total between these two generators could rise by some 350kt compared with normal consumption.

On company news, Swiss-based Xstrata reported total coal production of 43.8mt during the first half of this year. This is an increase of 4.2mt or 10.6% compared to the same period in 2008. Australian output was 18.8mt compared to 16.9mt during the first half last year. South African production was down by 1.2mt to reach 9.8mt while output in the company’s American mines totalled 10.4mt which was exactly double the level during the same period last year. Xstrata made an approach to Anglo American with a view to merging the businesses. Anglo’s Board made a rapid rejection of the proposals stating it would not be in the best interest of shareholders. The proposal is also reported to have been unwelcome with union members in Australia’s coking coal sector. Brazil’s Vale is rumoured to be a potential rival to Xstrata in pursuing Anglo over the coming months as consolidation of the industry continues. In February, Anglo American reported annual results for 2008 while suspending dividend payments amid a cost reduction programme and a reduction of more than 50% in capital expenditure in 2009. In 2008, operating profit from coal more than tripled compared to the previous year to reach US$2.24bn, and production was at a record. While demand for thermal coal was reported to be relatively firm, the slump in steel production was adversely affecting demand for coking coal. Coal output was expected to be lower this year due to the downturn, and the planned 10% increase in coking coal production during FY2009 had been halted. Thermal coal production was expected to be 2mt lower in FY2009 compared to last year. Across the business, 19,000 jobs were to be cut.

UK Coal has reported the average price for its coal for the first half of 2009 was £1.80/Gj which was just above the £1.79/Gj achieved in the same period last year when world markets were soaring to record levels. The company stated that new contracts significantly increase their long-term contracted coal prices. Meanwhile, Corus was reported to be cutting its workforce in the United Kingdom and the Netherlands by 2,000 due to the slump in demand for steel. Back in Switzerland, Glencore is reported to be exploring a stock market flotation and has been in discussions with bankers. The company could be seeking new sources of capital for future expansion, but an initial public offering is considered to be some time off while commodity markets recover to more attractive levels in the coming years. Meanwhile, Swiss-based commodities trading house Trafigura is understood to be continuing to expand its coal trading desk with several new staff being recruited this year.
Ukrainian steelmaker, Metinvest has purchased US coking coal producer, United Coal. This is the latest in a series of acquisitions of US coal assets by companies in the region. The first cargo of coal was reported to have been delivered in September through the Black Sea.
On the supply side to Europe, as the Phase V expansion of Richards Bay Coal Terminal nears its commissioning date, there have been reports that exporters continue to haggle over tonnage allocations. Existing exporters and new shippers will not have sufficient rail capacity to service the full 91mtpa potential of the port, and the existing shippers are unwilling to accept a cut in their share to allow the newcomers more rail capacity. The facility is unlikely to achieve full capacity until after 2015 due to constraints in rail capacity.
While there was positive sentiment in the freight market in early August that short term demand was firm, this has now been countered as players consider the flow of newbuilds in the fleet will boost supply of vessels. Rates have responded accordingly, and dropped by as much as 17.6% in one week. So even amid the most acute turnaround in economic conditions, it is clear that the coal industry has been able to continue by adjusting its operations accordingly. Although Europe is not expected to see growth in thermal coal trade as is likely in Asia and elsewhere, and the impact of the past year has resulted in a sharp adjustment in imports, there will still be a large market for coal overall in the years ahead.
Dr Tim Jones is Director of Consultancy and Editor of the weekly publication Coal Market Intelligence which covers 11 spot markets worldwide, gives key information on the latest deals and tenders, company news, people and jobs, industrial relations, and ports, shipping, and freight rates. A quarterly in-depth analysis, Global Coal Market Quarterly, is produced in association with Global Insight.