Americas coal trade

After the first few weeks of 2012, coking coal suppliers were taking some encouragement from comments in the USA that a recovery was now more likely for the market, with north America and Asia leading the improvement. Several meetings between domestic US producers and consumers were understood to have resulted in little immediate new business, but as the first half of 2012 developed, a number of coal industry participants believed there could be more activity. Xcoal was rumoured to have sold a cargo of hard coking coal to a European steel maker in the spot market in late January. The price of the mid vol material was believed to be around US$220/t FOB (free on board) which suggested a small premium to the then current spot market level. Spot prices of hard coking coal had, however, firmed by about 1–2% over the previous couple of weeks. Some predictions suggested the quarterly contract price for the April quarter would be US$225/t FOB for the reference brand.

Coal industry participants at Coaltrans USA early in the year suggested that the opportunities for export of coking coal in the coming years need to be exploited in order to survive. Market and environmental conditions, as well as competition from natural gas were being seen as a major threat to the survival of many thermal coal operations.
One commentator felt that up to 75mt (million tonnes) of thermal coal could be lost due to mine closures in Central Appalachia. Some believed the US shippers were unlikely to be able to compete on price in the thermal coal export markets in Europe and Asia. According to reports from the conference, Arch Coal believed there could be a shortfall of 300mt of coal in the seaborne market in 2015. Around 180mt of that would be coking coal. Rising costs were, however, forecast to put the US coal industry at a significant disadvantage in international trade. Colombia’s coal exports to Asia have been increasing once
more this year, with market share approaching 9% of the total recorded in March, and then 1.525mt or 22% of the 6.93mt recorded in April. Of this, 0.818mt or 53.6% of the total was
shipped to China. The latest data indicated that the European market accounted for only 54% of Colombian coal exports in April — about 3.74mt. At the beginning of 2012, Drummond was reported to have set a production target of 29mt of coal this year. Construction of the company’s direct loading port was a major project for this year, with the company hoping it would be completed by late 2013 with a capacity of 40mtpa (million tonnes per annum).
Colombia’s coal industry is not without its problems. FARC terrorists had bombed Cerrejon’s rail line on 18
December 2011, and also targeted a coal train, derailing 11 wagons. Deliveries to the port were disrupted for two days. Thankfully this year has, however, been relatively free of terrorism.
In the USA, coal exports through Hampton Roads reached 15.8mt during the first four months of 2012. This was an increase of 1.7mt or 12% compared to the same period in 2011. The Asian market is forecast to continue to grow this year, and for the USA overall, some 12mt has been forecast to be taken by China. Coking coal would account for 8mt of that amount.
As the American coal exporters are now more engaged in the international markets, the thermal coal and coking coal spot markets in all regions are of importance to them, and they have been tracking movements more keenly this year in such places as Indonesia and China. The accompanying charts show the thermal coal spot price decline in all areas during the course of this year, as monitored by e-coal.com.
The hard coking coal shippers have also seen a challenging first half of 2012, but at the time of writing there has been an improvement in the price of hard coking coal as a result of steady demand and tightening supply mainly out of Australia where a long running industrial dispute between BHP Billiton Mitsubishi Alliance and the unions has resulted in numerous work stoppages at the mines in Queensland’s Bowen Basin. This has had a knock-on effect on coking coal exporters in the Americas. The threat of industrial action on the rail lines in Canada, however, resulted in the government recently legislating to prevent such action which was deemed potentially harmful to the Canadian economy as a whole. A tightening of coal supply to the Canadian ports has therefore just been avoided, but that would have had a further impact on the price of coking coal.
In recent market news, US exporters have been encouraged by the recent reference price of US$225/t FOB agreed for hard coking coal contracts for delivery in the July quarter in the Asian markets. The Atlantic market remains more of a challenge, however, and buyers in Europe are not keen to pay the higher price. With freight rates putting the US shippers at a disadvantage in the Asian market, the European steel makers and other buyers are arguing that the price of US material should be lower for them as the US shippers have no price advantage in selling to Asia as an alternative. The indicator price of low vol hard coking coal at the US east coast ports remains at US$210/t FOB with high vol material achieving around US$17.50/t less. A few weeks ago, high vol hard coking coal was priced at just over US$190/t FOB in the spot market, and the indicator price was US$191/t FOB in mid- May. US traders suggested there was some activity, but the supply/demand situation remains unchanged. Some lower quality coking coal may have been sold into the domestic thermal coal market at weak prices, which may distort the price being reported for coking coal if the market is not properly analysed.
The disruption to coking coal supply in Queensland due to the long-running industrial dispute at the BMA mines was being exacerbated by heavy rainfall in early April. Buyers in Asia appeared to be getting more anxious about supply in the light of the force majeure declarations that had impacted the markets, and there had been reports from Canada that the coking coal shippers there were seeing more and more enquiries from the Asian steel makers. There were reports that the spot price for premium grade hard coking coal in Canada had increased by up to US$10/t FOB following the force majeure declaration by BHP Billiton Mitsubishi Alliance.
Back in April, US shippers were reported to have settled the quarterly contract price of low vol hard coking coal with some European customers at
US$210/t FOB in line with earlier settlements in Asia. That was for deliveries in the April quarter. In a rising market, other buyers were expected to follow in the coming weeks and are understood to have done so, after hoping for a price of around US$205/t FOB. In early March, there had been reports suggesting Teck had sold a trial cargo of hard coking coal to a new customer in China for about US$175/t FOB. There had also been reports that the producer has excess tonnage on the pads at the ports. Teck was understood to have settled the quarterly contract price of hard coking coal for the April quarter with Korea’s Posco at US$206/t FOB. The price was close to market expectations over the previous couple of weeks as the
shipper was believed to have been offering at US$210/t FOB while Posco was aiming for close to US$200/t FOB. The price represented a decrease from the previous level of US$235/t FOB amid a softening market since the start of 2012. Some observers believed this new price could set the floor for the hard coking coal quarterly contract price this year, with some optimism that Asian steel demand would improve in the second half. US exporters had also been signalling their expectation of an improvement later in the year.
There was more news of low priced US thermal coal in the middle of May. Although the specifications are unclear, there were reports of a 75kt cargo of US thermal coal being sold to a European customer for US$87.00/t CIF (cost, insurance, freight) with delivery in June. Assuming this is a Panamax deal, this could net back to a coal price of well under US$70/t FOB.
In the thermal coal market, Pacific Coal is reported to have sold 257kt of coal from its La Caypa and Cerro Largo mines in Colombia during Q1 2012 at an average price of US$103.27/t FOB. This compares with 381kt sold in the same period last year, at an average price of US$96.92/t FOB. Meanwhile, Canada’s Nova Scotia Power has been in the market seeking up to 1mt of coal. Colombian shippers are understood to see this as a welcome opportunity amid
a challenging north Atlantic market in recent months. In April, US thermal coal was believed to have been purchased by Enel in the previous weeks, with delivery to Italy during the next six months. The price has not been confirmed.Around that time, Chinese buyers were understood to have been offered higher sulphur coal from the USA at prices around US$100/t FOB basis 6,000 kcal/kg GAR (gross air dried). Availability might have been an attraction as the situation in Australia was less certain for the Asian consumers in early April.
As 2012 got under way, the Colombian exporters appeared to be winning favour in Asia once again, with Kowepo reported to have awarded 160kt of the business to the Colombians following its tender in February seeking 170kt of coal.The coal specifications included ash 20% (max) adb, and CV 5,600 kcal/kg NAR (net as received) (min). Rumours of Colombian coal being sold for around US$89/t FOB as early as that in 2012 may have been linked to renewed Asian activity, and some observers believed that could result in some misleading price reporting if the coal quality was not recognized, as happened a couple of years ago in some coal industry media sources. Higher ash material with poorer qualities would not be typical of the established markets in Europe and the Mediterranean, but with ongoing weak demand
there, the Asian deals were expected to dominate for a while again this year. At the start of January, Colombian shippers were reported to have been discussing supplies with consumers in the eastern Mediterranean. At that time, buyers were believed to have been bidding around US$100/t FOB basis 6,000 kcal/kg NAR while the exporters were asking a little over that figure for deliveries during Q1 2012. Despite the activity in Asia this year, the American coal
operations have been aware of a serious issue. The international coal market appears to be facing a serious problem, with China having gained a reputation for not honouring contracts amid a
softening market in recent months. That country could import around 215mt this year, so the harm to the market caused by uncertainty about deals could be significant. A number of market players now expect traders and utility customers to cancel coal shipments at short notice if a more favourable deal is available. This is not healthy for stable coal business, and the number of legal actions is increasing. The attraction of the Chinese market to suppliers further afield in the USA and Colombia for example, is beginning to fade due to these practices. In some cases, Chinese traders have gained a reputation in the international market that a contract means nothing to them. Some market players expect the situation to get worse in the coming weeks. The latest forecasts suggest that the slowdown in Chinese
manufacturing will reduce coal consumption in the near term, and coal stockpiles are reported to have increased at the main ports amid the slowdown. Meanwhile, the European thermal coal market continues to be well supplied. Coal burn has, however, been increasing there recently, and in the USA there are reports that coal burn has also been increasing as the price of natural gas has been rising.
The latest data regarding Brazil’s steel industry which is of interest to the coking coal and metallurgical coke shippers in the north and elsewhere around the world, indicated that 3.1mt of crude steel was produced in March. This was an increase of 2.2% compared to the same period in 2011 amid challenging times for the Brazilians who have reported that they are facing strong competition from cheap Chinese steel imports which they claim are flooding into the country.The strong currency in Brazil is a disadvantage, and in the case of steel, what is considered by some to be an undervalued Chinese currency makes the situation worse. Brazilian steel maker USIMINAS reported a loss of US$19.7m for the first quarter of 2012 which was attributed to increased production costs as well as the competition from China and the currency situation.The long- term trend for steel production continues to be positive, however, and levels are almost
back to where they were before the crash of October 2008. The Brazilian steel makers are understood to have been purchasing Colombian metallurgical coke in the past month or so for about US$355/t FOB. For the Colombians, the Brazilians remain the most important market for coking coal with a market share of 62% of their exports and the buyers are understood to be investing in the Colombian industry with finance for infrastructure development.
In other parts of the Americas, the government in Argentina is planning to increase coal-fired power generation capacity from
0.5% of the country’s mix to 4% by 2025. At present, the plans are to use domestic coal which is generally of lignite quality, so this is of limited significance to the international market now. In Chile, MPX Energia is facing challenges over the proposed Castilla coal-fired power station after an environmental permit for Goldcorp’s El Morro copper and gold project was recently suspended by the Supreme Court. A court ruling earlier this year required the resolution of various environmental issues at MPX Energia’s US$5bn project, and the appeals process looks likely to be complicated by the Goldcorp ruling.
With regard to coal projects, Continental Coal is looking to develop a large export mine in the Powder River Basin of the USA. An operation with a capacity of 5mtpa and resource of 1bnt could result if the project
succeeds. Meanwhile,Korea’s Keystone Global is rumoured to be close to purchasing coking coal assets in Central Appalachia. The company is rumoured to have US$480m to invest in around 100mt of coal reserves in Kentucky or West Virginia. Elsewhere,Vale is selling its coal assets in Colombia to Colombian Natural Resources (CNR) for US$407m. The buyer is part of the Goldman Sachs Group, and had been the expected purchaser for some time. The deal includes the 5.4mtpa El Hatillo mine, the Cerro Largo deposit with estimated reserves of 500mt, Sociedad Portuaria Rio Cordoba Capesize port in Cienaga, and 8.43% of the Fenoco rail line linking the mine and port facilities, with a 3.5mtpa allocation. CNR will now have its own port facilities, and twice the rail capacity it had previously. Further development of the port will be a priority. Rumours this year suggest Anglo has a strategy to expand in Canada in the coming years through the acquisition of Walter Resources’ Western Coal followed by a merger with Teck Resources.
In March, it was announced that the Colombian government is to auction coal concessions under a system that is designed to ensure the winning bidders have the necessary funds to proceed with development. The country’s coking coal resources are expected to benefit from the new plans. In the past, coal projects were not developed in the timeframe expected, with speculators playing the market
as well as the more serious resource developers. The government appears to be putting a stop to that practice by removing the opportunities for the speculators.
American coal producers operating elsewhere have been in the news recently. Peabody Energy has gained approval from 80% of its workers for the new three-year enterprise bargaining agreement at its mines in New South Wales. Peabody recently also achieved approval of the new agreement at the North Goonyella mine in Queensland. Meanwhile, BHP Billiton Mitsubishi Alliance appears to be no closer to reaching agreement with its workers in their long running dispute.
On the infrastructure development topic, in Colombia, Ferrovial Agroman is to build a second coal loading jetty for Cerrejon at Puerto Bolivar.The US$37.9m project will increase capacity from 32mtpa to 40mtpa. Elsewhere, the Panama Canal Authority is planning to increase tolls by 15% but shipping companies have objected due to the economic recession. Reports indicate that the International Chamber of Shipping has written to the Authority stating the increase is not acceptable in the current economic climate. In early February it was reported that Canada’s Grande Cache Coal is to be acquired by a joint venture including Marubeni Corp and Hong Kong’s Winsway Coking Coal. The price was rumoured to be around US$350m.
While thermal coal spot markets are seeing a weak period in all regions, the hard coking coal and metallurgical coke markets appear to be holding up a little better. The renewed problems in the Eurozone are not helping global sentiment, and the commodities sector has been affected during the past months. Until some positive news emerges, and the financial markets become less volatile, the markets look set to remain uncertain and weaker. Asia remains the more attractive market for coal shippers around the globe, with US exporters still looking more to the east rather than across the north Atlantic. Reports suggest, however, that availability of US thermal coal for Europe is high, and when required can be readily shipped.The weakening spot
Dr Tim Jones is Director of e-coal.com 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.