This part only considers internationally-traded coal, which has quite different metrics to that of  internally traded coal.

For example, the rapid increase in the supply of natural gas in the United States has put extreme downward pressure on natural gas prices. This in turn has seen power generators switching from thermal coal to gas. The reduction in coal demand has depressed prices and resulted in production cutbacks.

Coal is traded on the spot market and by way of fixed term contracts. Because of coal’s variability, there is no single price for each coal type although there are standard specifications. All prices are in USD.

 

THERMAL COAL
The spot price for thermal coal reached a peak of around $180/t (per metric tonne) prior to the GFC, during which the price fell to $60/t. It then recovered to around $140/t in early 2011 before declining to $80/t in late 2012. The price has since recovered and contracts for 2013 are expected to be in the  $90-100/t range.

While the price decline has led to some mine closures and cost savings measures such as the curtailment of exploration; the strong demand over the past few years has also lead to new mine developments and new entrants to the market.  It seems that after several years of good demand growth, the market is moving towards a surplus over the next couple of years.

METALLURGICAL COAL
The price peaked at around $350/t in early 2011 and has subsequently fallen steadily to around $150/t. At current price levels there is a price differential of about $40/t between higher quality HCC (“hard coking coal”) and PCI (“pulverised coal injection”) coal. Thus if premium HCC is selling for $160/t, PCI would fetch around $120/t.

As for thermal coal, there have been mine closures and cost saving measures implemented. While the price seems to be stabilising, it is likely to be capped by modest demand growth and increasing supply.

ANTHRACITE
High grade and ultra high grade anthracite prices currently range between around $110/t to $180/t, depending upon quality. The anthracite price is influenced to a degree by the coke price, which is currently around $300 to 320/t. This is because anthracite is mainly used alongside coke as a reductant in furnaces.

The anthracite market is much smaller than the markets for thermal and metallurgical coal, at around 40mtpa. What makes it unique is that, based upon the potential substitution rates for coke, there is potential demand far in excess of current supply. This potential demand is predicted to exceed supply by around 60mt in 2016.

FUTURE DEVELOPMENTS
Thermal coal is facing some headwinds, however it appears that the current price could be something of a floor. Although it is a direct competitor to natural gas, it is unlikely that the situation in the United States would play out worldwide, even if all the proposed LNG (“Liquefied Natural Gas”) developments come to fruition. Rising gas prices, on the other hand, will almost certainly lead to a switch back to coal.

Demand growth is likely to continue in China, although at a more subdued pace, and Indian demand could be a significant driver in the years ahead. Existing suppliers are facing rising costs and increasing competition from new entrants to the business. Another pressure could be reduced Chinese demand as a result of increased domestic production.

Demand growth for metallurgical coal is almost entirely in the hands of China, and probably India, in the years ahead. Growth is likely to be subdued and the market may enter surplus.

Supply growth will increase through the entry of new supply, particularly from Mongolia and Mozambique. It can be expected that supply growth from large existing suppliers such as Australia is likely to be modest.

That leaves the interesting case of anthracite. If predictions that substitution for coke will increase with increasing anthracite supply, then demand growth can expect to be sustained. Supply is likely to increase as there are several new producers looking to enter the market or expand production. However, most projects are of relatively modest scale.

In conclusion, regardless of short term fluctuations, coal is the cheapest and the most abundant energy source on the planet. It will remain the world’s prime energy source for the foreseeable future.

 

29 November 2012 Commodities