Thermal coal market update

While the international trade in thermal coal is relatively small compared to the overall level of production worldwide, it still has important repercussions for power plant operators, particularly those situated near the coast. With this in mind, IFandP takes a close look at the current state of the market and the outlook for 2010 and beyond.

According to EURACOAL’s latest report, 2009 continued the trend of demand shifting from the Atlantic market to the Pacific, thanks in part to demand growth in China and India, coupled with supply growth from Australia and Indonesia. Peabody Energy is showing signs that it expects this trend to continue, with the recent opening of a new office in Singapore, with the goal of expanding its coal trading activities within the Asian region.

The seaborne steam coal trade witnessed a 9Mta increase in volume in 2009 to 641Mta. And as can be seen from tables 1 and 2, all of the largest swings occurred in the Pacific market, which expanded by some 21Mt, with extra volumes entering the market from Indonesia, Russia and Australia. The fact that Chinese coal supply recorded the greatest change (-20Mt) is easy to rationalise, given the sheer size of both demand and supply within the country’s domestic market, causing small percentage swings to result in comparatively large changes in traded volumes, to the extent that a one per cent change in total Chinese coal output changes the country’s import/export balance by around 30Mt. Meanwhile, the Atlantic market shrunk by 12Mt, primarily due to lower exports from Columbia, the USA and Venezuela.

Steam coal prices, like other energy commodities have seen considerable turbulence over the past two years, reaching an unsustainable US$219.00/t in August 2008, before falling to a low of US$68.00/t in March 2009. The high levels of volatility were boosted by those in the freight markets for bulk carriers. Having since recovered back to more acceptable levels (from the perspective of producers), there are considerable barriers to stronger coal prices in the European market, in the form of high coal inventories at ports and power plants, particularly in Spain and the UK. This was despite a 63.9Mt reduction in total coal supply in the region to 724.9Mt for 2009, highlighting the damage done to industrial and residential demand by the recession, which was exacerbated by the fact that occasionally coal shipped from the Pacific proved to be cheaper than that produced locally. The largest single change in European hard coal production was a 6.1Mta decline in Polish output, coincidentally the same as the total reduction in European hard coal production. Polish domestic consumption was hit in 2009 by the economic situation, while in the UK, a significant reduction in the relative price of natural gas caused thermal coal demand to drop. Spain’s push towards greater use of renewables also helped pushed thermal coal use down further. European lignite production fell by 16Mt in 2009 to 406.7Mt, with the most significant declines coming from Germany (5.4Mt) and Romania (5.2Mt).