At the beginning of 2012, in terms of the global economy, the new year got off to a better start than was expected in some aspects, with employment data from the USA showing encouraging improvements. Financial markets were showing more positive signs during the first week of 2012 and the mining sector took a boost after some positive trade data was published in China. In the coal sector, the wet season in Queensland had so far not disrupted coking coal production significantly, and with lower demand, there was not likely to be much upward impact on prices. Traders had been anticipating a softening trend in the spot price in the first quarter, with some possible change in March if the Chinese picked up demand. The much milder winter in Europe had kept a cap on thermal coal demand, with consumers having high stocks of coal on their pads. Thermal coal spot markets around the world saw a modest firming in the first week of 2012. Capesize freight markets softened significantly over the holiday period and the approaching Chinese New Year holiday season was to cause the usual lull in international trade. Panamax freight rates had not seen as much of decline on the European route.As the year got under way, thermal coal spot prices began to firm in all the major spot markets.The significant movements in freight rates in 2011 influenced producers’ offered prices, particularly into Europe. By the beginning of 2012 there was little differential between the Colombia — ARA rate and South Africa — ARA rate, although little spot business was being done. Heavy rains were disrupting coal exports from Colombia, with delays of more than two weeks being reported at the ports. Demand for hard coking coal remained lacklustre in most markets, and there were reports that stockpiles of high vol material had been growing at US mines and barge loading points. Many market players were anticipating a quiet first quarter of 2012. There were already plans to reduce output at some mines in the USA amid the weaker market conditions. Freight rates continued to soften during January, with substantial declines on all the major coal routes since December. The increase in the global fleet due to a record year for newbuilds in 2011 combined to send the freight market down. By the end of January 2012, the average Panamax daily rate was around US$7,850 which was over US$5,000 less than the level at the end of December. Capesize average daily rates slumped from around US$27,000 to US$6,630.

As the first quarter of 2012 progressed, amid relatively quiet spot markets, corporate and economic news was dominating the news.Activity in the mergers and acquisitions sector got off to a strong start in 2012, with the major move being rumoured between Swiss-based Glencore and Xstrata. The cold snap in Europe broke the unusually mild winter weather, and coal burn was boosted during February. India continued to seek energy security in the coming years, with state-owned NTPC actively looking at investments in Africa’s coal resources and power sector, presumably to assist the development of the mining sector for its own trade plans. Reports from the Coaltrans USA conference in Miami indicated that Arch Coal believed there could be a shortfall of 300mt (million tonnes) of coal in the seaborne market in 2015. Around 180mt of that would be coking coal. Rising costs, however, were forecast to put the US coal industry at a significant disadvantage in international trade. By March, the pressure was on for the Australian coking coal exporters as the rest of the world’s shippers waited to see what reference price they agreed with the Japanese in the wake of Canadian settlements in Korea. The European thermal coal market continued its long period of lacklustre activity as spot prices softened in the Atlantic. South African spot business was confined to Asia, with the European market having little influence. Prices for coal delivered to Asia in 2013 were about 5% higher than the then prompt spot price at Richards Bay. US shippers of higher sulphur coal were securing some business in Europe, but at a lower price in the spot market.

Thermal coal spot markets in Asia softened by several dollars on weaker demand, while in the lacklustre Atlantic market, prices remained rather flat. The Newcastle spot market decreased to around US$110/t FOB (free on board) basis 6,700 kcal/kg GAD (gross air dried) according to reports from traders in Australia and Japan. Rumours suggested some

deals were made for contract supplies of Australian hard coking coal in Europe for the April quarter at about US$210/t FOB which were a premium over the previous deals made in Korea at US$206/t FOB. The European steel mills were aiming for a delivered price of around US$225/t CIF (cost, insurance, freight) during their negotiations.

The European thermal coal spot market remained lacklustre as the first quarter drew to a close, with high coal stocks reported on the pads in the Netherlands. Some interest in US coking coal had been reported, with some new business rumoured to have been done. The Colombian exporters were not seeing much activity in their traditional markets in the north Atlantic, and appeared to be looking at opportunities in Asia once more. The Asian thermal coal spot market was also weaker, however, and prices softened in all the main loading areas. South African exporters were finding the Indian market was quiet, and buyers were waiting to see if they could pick up tonnage at under US$100/t FOB basis 6,000 kcal/kg NAR (net as received). Demand for steel in China was forecast to grow by 5.7% in 2012, but while this would still be growth, some players perceived it as disappointing news as the growth rate was about a half that seen in recent years.

Thermal coal spot prices firmed a little in the Atlantic market following the Easter holiday weekend. Russian material was moving as far as Spain, with some more interest in US coal. The Colombians were enjoying renewed activity in Asia, but that spot market softened in mid- April. Demand for coal in China was forecast to remain sluggish during the second quarter amid slower economic growth. The spot market for premium quality hard coking coal continued to firm with some deals reported in Japan at prices above US$212/t FOB. There were reports of the spot price reaching US$215/t FOB and some traders suggested the US$220/t FOB mark would be reached before the end of the first half of 2012. The weather disruption in Queensland, however, was limiting what was available for prompt loading. Although prices were rising, the quantities were not large at that time. BHP Billiton’s decision to close the Norwich Park mine also impacted the supply of coking coal. The European steel makers appeared to be in no desperation to secure coking coal, and the situation in Australia was having little impact in Europe. On a positive note, the decision to restart an idled blast furnace in the United Kingdom gave another glimmer of hope that market prospects were improving.

Marketing managers from the Australian coking coal producers were visiting customers in Japan and Korea to negotiate contract prices for the July quarter. The expectation had turned around during May, and was now more positive among the shippers. A contract price above US$220/t FOB for the reference brand was expected to be agreed according to sources in the Asian steel industry. In contrast, thermal coal markets continued to soften significantly during after Chinese customers reneged on contracts when the market moved against them. The entire global coal market, as well as investors in the commodities sector had suffered as a consequence of those contracts not being honoured.
In the corporate arena, the economic climate led some major mining companies to be cautious about spending on exploration and development. BHP Billiton was one example, where its initial expectation of investing US$80bn in project expansion in 2012 was to be reduced. In the freight market, oversupply of vessels in the global market was attributed to a slump in rates, and congestion at ports in Australia, Brazil, China, and India accounted for over 60M dwt at the end of May. This was the highest level for three months.

In June,Anglo set the reference price for hard coking coal with Korean customers at US$225/t FOB. The European steel makers were resisting such an increase in price amid the different situation they are facing compared to Asia. The Eurozone crisis had cast a shadow over much of Europe, and the markets were far from buoyant. Sensible plans by the European Union were being scuppered by opportunist politicians, particularly in Greece, and a bailout for Spain’s banks had only a temporary positive impact on financial markets. Following reports of Chinese buyers cancelling coal contracts, there were reports that other buyers were seeking to get out of their contracts by paying a large fee to retain respect from the sellers.The majority of these buyers appeared to be in Europe according to Australian and Indonesian exporters. They realized the damage they would cause for themselves if they dishonoured contracts in the way some other consumers and traders have been doing in China in 2012.

By July, despite the global recession, coal exports through some Australian ports appeared to have been healthy during the previous 12 months, while in Indonesia the government continued to cause uncertainty about its proposed export tax on coal. The South African government was also causing uncertainty, in this case over the proposed carbon tax.

There were growing concerns about the resurgence of terror attacks on coal industry infrastructure in Colombia during the previous few months. Minor disruption was caused on the rail line to Puerto Bolivar, but other incidents had largely been unreported outside the country. The coal industry and international players were beginning to highlight the problem once again, with the government coming under criticism. A strike also impacted the Colombian export coal sector in July. There were reports that Ukraine was exporting metallurgical coke to India at discounted prices and this was impacting the market for higher quality coke, and consequently the hard coking coal market. The weak market in the USA had led to job losses reaching more than 250 as the situation began to impact coal communities more drastically. Meanwhile,Indonesian coal output was reduced amid the weak market.

Major coal miners were reducing expenditure on project development in Australia amid the weak economic conditions. BHP Billiton and Yancoal were among those reporting their latest position. Freight rates remained close to the lows of late 2008. The Richards Bay–Rotterdam Capesize route at US$6.00/t was priced at about what was the pre- boom historical average. Scrappings had increased in 2012, with 81 Panamax vessels reported scrapped in the seven months to 31 July. Capesize ship owners are understood to have been trading at less than their operating costs in the weak market. Traders in the Asian region were anticipating a pick up in spot market activity in India as the monsoon season drew to a close. Spot tender activity was relatively healthy, and there were signs of renewed interest from the steel making sector there as well. Indonesia’s coal output for 2012 was expected to be reduced further due to the weaker market seen during the course of the year. At the start of 2012, a total of 390mt was anticipated but by September about 340mt was more likely. Settlements on the quarterly contract price for hard coking coal had been surprisingly low. Tonnage commitments were the key point, to enable BMA to proceed in a sustainable way which the Japanese would have agreed is in their interests as well. Forecasts on the price of PCI (pulverized coal injection) material for the new contract period suggested it could be as low as US$120/t FOB based on these settlements. Such a price would be unsustainable for the Australians and Canadians, and rumours suggested one Queensland producer agreed the new contract price at cost for the time being amid low demand for PCI material. The price of coking coal had reached a level which is generally considered to be unsustainable and would need to increase to prevent the collapse of some operations. A number of projects were already being shelved due to the market conditions. In the freight market, there were further decreases in the Panamax spot rate, after the Panamax round voyage rate in the Atlantic had already fallen to a record low.

By late September, the rate of decline in Chinese manufacturing output growth was showing some signs of levelling out. Production cuts, mine closures, and job losses were dominating the news around the world as the coal markets showed no signs of strengthening in east Asia, Europe, or the Americas. While some major producers had given more specific information about their intentions, others including Rio Tinto had only announced more vague indications of job cuts in Queensland and New South Wales. New Zealand’s Solid Energy was understood to be reducing its workforce by a half.

In early October, the rate of decline in the international coking coal spot market slowed in the USA. This seems to have been due to a focus on domestic contract negotiations for 2013 which were a major concern for producers as prices were seriously under pressure. Sentiment in the coking coal market in Asia was improving just ahead of Coaltrans in Istanbul.

Delegates at Coaltrans in October appeared more gloomy than at any previous event, including that in the immediate aftermath of the stock market crash of 2008. The general sentiment was that there would be no near term improvement in market conditions, but at some point in 2013 thermal and coking coal prices will firm a little. Delivered prices to the ARA market were expected to reach close to US$100/t CIF. South African thermal coal prices were likely to recover to the low US$90s per tonne in 2013, compared to the low US$80s per tonne seen at the time. Market players felt it would take three years for thermal coal FOB spot prices to recover to levels seen a year earlier. The ongoing financial crises in a number of European countries was attributed to the pessimism, with little confidence in government policies to rectify the situation being evident. Coal companies in the United Kingdom were suffering from the market slump, as well as unexpected government imposed tax bills. Job losses were continuing in Australia, and BHP Billiton reported a decrease of 20% year on year in coking coal sales during the July quarter.

By November, there were signs that the Chinese economy is improving, with the latest financial sector analysis indicating greater output in October compared to September. A pick up in the Chinese economy is a long-awaited condition among commodities markets, so there was some hope that this may begin to occur. With the change in leadership in China, there have been predictions that the country’s wealth could double in the coming ten years. Perhaps some of the demand conditions seen before the financial crisis of 2008 will return to the coal and related sectors before much longer. The upturn in demand for coking coal from China was continuing, with prices firming in the Australian market. A small knock-on effect was also seen in the subdued Atlantic market.

A number of key marketing managers and coal buyers had been attending the Carbon Forum in November, and rumours suggested European buyers in Germany, Israel, Spain, and Turkey were actively seeking coal. The potential for growth in coal demand in Turkey had been discussed, and all the Atlantic suppliers were understood to be optimistic for the coming decade. This could not have come too soon for the Colombian producers who were understood to be feeling the pinch of the slump in demand very seriously. Cash was rumoured to be getting tight.

Thermal coal spot prices firmed significantly in the Asian region in late November, with a rise of about US$4/t FOB basis 6,700 kcal/kg GAD or 4.6–5.6% being seen across the main markets. Some observers were now more convinced that the spot prices had seen their lows in this cycle. Thermal coal spot prices also firmed in the Atlantic markets, with spot deals being seen for Colombian coal in the USA, and US coal winning some spot tender business in the Mediterranean market.

Job losses continued in the coal sector, as well as related industries around the world. Australia was particularly badly affected in 2012, with reports of up to 5,000 jobs lost in Queensland alone. There may be more to come in 2013. Despite this, significant coal development is continuing in other parts of the world including Africa.

The coking coal markets were giving a tale of two oceans, with firming in the spot price seen in the Pacific as the spot price fell in the Atlantic. There were differing conditions in each area, with supply and demand factors causing the price movements in different directions. Demand from China’s steel makers was continuing to drive the coking coal market up in Australia. In the thermal coal market, some players had begun guessing the contract price for JFY2013 amid a much weaker spot market compared to 2011 when the contract price was set at US$115/t FOB basis 6,700 kcal/kg GAD in Japan. The spot market had been firming during November. Customers were expected to be told that it is in their interests to pay a sustainable price for Australian coal, with increasing production costs being a major factor affecting operations there. This is also true elsewhere. Thermal coal spot markets had been firming in all major regions, with continued buoyancy seen ahead of the year end holidays. US thermal coal exporters were reporting renewed interest in Europe, with deals being reported there. Meanwhile, economic indicators showed that China’s manufacturing sector is growing again, after more than a year of negative growth.

With regard to competitor fuels to coal, the cost of new nuclear power capacity has soared in the wake of the Fukushima disaster due to more stringent regulations in Europe. EdF reported a substantial rise in the cost of its Flamaville project in France to US$10.6bn.

Amid the global recession, Chinese economic growth was 7.7% in 2012, and the government has forecast growth of 8% again in 2013. Traders and suppliers are hopeful that demand for commodities and coal will increase in the coming 12 months.

The year saw a mix of some optimism in the international coal sector to begin with, but this was impacted by a turndown in the economic situation by the end of the first half. Several months of depressed market activity ensued, but towards the end of 2012 there was a distinct improvement in many markets. The conditions cost thousands of jobs in the industry in 2012 and it may be some time before those are regained. When the coal market picks up, however, it can be unexpectedly rapid. So let’s hope the recent trend continues. DCi

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.