Thermal coal markets
Global seaborne thermal coal demand increased by nearly 9%during the year to 692 million tonnes, underpinned by continuedstrong demand from the Asian economies. An 18% growth indemand from the Pacific market more than offset the impact ofweak economic growth, high coal stocks, low gas prices and lowerimport requirements in the Atlantic market. In response to strongdemand, South African coal was diverted into the Pacific market,particularly to India, leaving a supply deficit in the European marketwhich was met by increased Colombian exports.
Chinese import demand remained robust in 2010 and was the main driver of strong demand growth from the Pacific market. Seaborne thermal imports for 2010 were 117 million tonnes, a 27 million tonne increase over 2009. Chinese import demand continues to grow as a result of insufficient domestic supply and transportation constraints. Indian imports increased by 25% compared to 2009 as a result of the ongoing development of coastal import capacity, new power station developments, growing industrial demand and domestic production short falls. Demand for seaborne imports also grew from Malaysia, Korea and Japan amongst other Asian economies.
The weakness in the Atlantic seaborne thermal coal market was primarily due to decreased demand from the UK, Spain and the US, with UK demand falling by 45% as low gas prices at the beginning of 2010 favoured gas burn over coal and record coal stocks, equating to nearly six months supply, suppressed imports. Measures introduced by the Spanish government to prioritise domestic coal suppliers over lower cost imports, together with lower gas prices in the first half, saw Spanish thermal coal imports fall 35% in 2010. Coal imports in the US declined as a result of low domestic gas and coal prices, principally impacting the import of Colombian coal.
While an additional 41 million tonnes of supply was added to global seaborne supply, this fell short of global demand by some 15 million tonnes. High levels of consumer inventory moderated the supply shortfall throughout most of the year. However, by year’s end the gap between supply and demand became more pronounced.
Supply from Indonesia grew by 47 million tonnes, but comprised increased low quality, sub-bituminous supply which grew by 57 million tonnes, while bituminous production fell by 10 million tonnes. In 2010, despite the impact of heavy rain, Colombian thermal coal supply was the only other major coal source to increase exports significantly, with mine supply up by five million tonnes to 68 million tonnes. South African thermal exports increased by 2.5 million tonnes to 64 million tonnes.
Bituminous coal supplies from China, Russia, the US and Vietnam declined by a total of 19 million tonnes during 2010, as Chinese export tariffs and Vietnamese policies to limit exports effectively discouraged exports. US thermal coal exports were limited by the prioritising of port capacity for higher margin coking coal and lower Atlantic market pricing during the first half of 2010. Russian exports were constrained by insufficient rail capacity and low European coal prices during the first half of 2010. In response to increased demand from Asian countries and reduced freight costs, South African and Russian coal continued to shift from the Atlantic market into the Pacific, eliminating the overhang of coal in the Atlantic market caused by falling demand in the West.
The tightening global supply-demand balance during 2010 resulted in strengthening thermal coal prices in the second half of 2010 in both the Pacific and Atlantic markets, as well as the Chinese domestic market. Spot coal prices in the Pacific market largely traded in the range of $90–$100 per tonne FOB for most of the year, before strengthening in mid November and reaching a high of $129 per tonne at the end of December. Benchmark contract prices for the 2010 Japanese Financial Year and mid-year contracts negotiated in March and September respectively were both settled at $97.75 per tonne, while 2011 contracts negotiated in December settled at $115 per tonne.
During 2010, European gas prices rose by more than $3/mmbtu from their first quarter lows, improving the relative competitiveness of coal-fired power generation and resulting in increased demand for coal and a reduction in stock levels. At Europe’s major import terminals of Amsterdam, Rotterdam and Antwerp, stock levels were down from 10 million tonnes at the start of the year to less than 6 million tonnes by year’s end. The recovery in European demand and increased demand from the Pacific markets led to South African FOB coal prices increasing strongly from around $80 per tonne at the start of the year to $129 per tonne by the end of the year. Colombian FOB prices rose from around $65 per tonne in January to trade at over $110 per tonne by the end of the year.
Outlook
Weather-related supply disruptions will continue to dominate spot market pricing into 2011. The impacts of flooding and substantial rainfall in Queensland, above average rainfall in Colombia and South Africa and seasonal rain in Indonesia, will continue in 2011. Supply shortages, coupled with cold northern hemisphere temperatures and associated increased coal burn, have further depleted consumer, mine and port stocks. For the balance of 2011, the seaborne thermal market is expected to remain moderately undersupplied. Supply growth, including a significant quantity of sub-bituminous coal from Indonesia, is not expected to satisfy projected demand. Supply shortfalls should maintain high pricing levels and lead to increased price volatility in response to any further disruptions.
Coking coal markets
In 2010, pig iron production in coking coal importing countries, excluding China, reached record levels, approaching 380 million tonnes. The increase in production was attributable to new capacity in Korea, Taiwan and India and further increases in capacity utilisation across Europe. This, coupled with growth in Chinese imports, drove global growth in demand for seaborne coking coal to 222 million tonnes, 20% higher than in 2009. Chinese imports of coking coal increased by 2 million tonnes to 32 million tonnes as a result of Chinese pig iron production growth and the restructuring of Chinese coal mines.
The recovery to almost full production capacity by Japanese steel producers supported a 20% growth in coking coal imports. Increased demand for Atlantic seaborne coking coal came from Europe, Brazil, Turkey, Ukraine and Africa, although levels remained below pre-recession peaks and a number of blast furnaces lay idle or operated at reduced rates.
Global seaborne demand totalled 45 million tonnes, 8 million tonnes less than supply resulting in restocking of consumer inventory drawn down during 2009. The impact of severe weather at the end of the year on production volumes has led to declines in both consumer and producer stocks. US seaborne coking coal exports increased by 60% during 2010 to 48 million tonnes. Much of the supply growth comprised high volatile coking coal that was switched from domestic thermal markets. These coals are of an inferior quality to the premium hard coking coal exported from Australia and Canada. Canadian coking coal exports rebounded in 2010 to pre-recession levels of just over 23 million tonnes, a 28% increase on the prior year.
Australian coking coal exports rose by 11% to 132 million tonnes in 2010 as a result of increased rail and port infrastructure capacity and a strong recovery in metallurgical coal demand. Higher market prices also supported increased exports of semi-soft coking coal, some of which was switched from thermal markets.
In 2010, annual coal pricing moved to quarterly coal pricing while spot market activity increased. Higher demand and Australian supply disruptions following heavy rainfall at the start of the year led to spot hard coking coal prices increasing from under $200 to over $250 per tonne during the first half of 2010. Term contract prices for the second quarter of 2010 were settled in March at $200 per tonne and further increased in May to $225 per tonne for the third quarter. As coal supply recovered during the second quarter, pig iron production in coal importing countries stabilised and Chinese import demand slowed, leading prices to moderate with hard coking coal spot prices decreasing to $180 per tonne FOB in July. Increased demand during the last quarter, combined with flood-related supply disruption to Australian suppliers, pushed up both end of year spot prices and the price for the first quarter of 2011 to $240 per tonne and $229 per tonne respectively.
Outlook
Supply shortages experienced in the latter part of 2010 are expected to continue through 2011 and spot prices in January surpassed $380 per tonne. It is expected that supply will continue to be impacted by the weather-related disruptions in Queensland, although the final supply impact is still being assessed, with further US growth limited by rail capacity constraints and port infrastructure. Canadian export limitations, due to port equipment failure, avalanche risk, imposed rail restrictions and strike action, may further disrupt supply volumes.
Rising steel prices, due to continued steel demand recovery and rising raw material costs, are expected to continue to cascade through the steel sector as hard coking coal supply shortages become increasingly evident. Limitations on steel production as a result of reduced coking coal availability may also lead to steel supply shortages, further supporting coking coal price increases.