AME Mineral Economics estimates that most tonnage contracted between Australian suppliers and Japan’s major electricity generation customers has been settled at close to US$45/tonne FOB, up a massive 68% on 2003 prices to the highest levels in over 20 years. South African prices are now closing on US$50/t in a highly commoditized European market.

 

Coal producers adversely affected by the recent fall in the value of the US dollar have welcomed the price increases, with exporters Xstrata and Rio Tinto benefiting in particular. Strong prices are expected to be maintained into 2005, encouraging new mine expansions and greenfield developments.

 

AME warns that such a massive price increase goes against the long-term trend with history showing that thermal coal prices have declined in real terms at an average annual rate of 5% between the early 1980s and last year.

 

Future price levels will be impacted by how long undersupply conditions prevail; the impact of environmental policies in Europe and Japan designed to control carbon emissions; and the price of gas, the major coal energy substitute, under unstable geopolitical conditions.

 

AME said Japan-Australia contract settlements in 2004 were marked by a wide divergence in price, ranging from around US$35/tonne to US$46/tonne FOB. This was in sharp contrast to 2002 and 2003, when a single commonly agreed price generally applied even after the effective collapse of the old reference price system.

 

Agreements made in March this year settled at the highest levels, such as between Xstrata and Japanese power utilities. Japan’s industrial customers were not spared either, with cement manufacturers contracting Russian coal at US$50-$53/tonne.

 

Customers who delayed settlement in the expectation that regional spot prices would ease before the beginning of JFY2004 were eventually forced to accept higher prices in order to secure tonnage. In particular, Chinese suppliers like Shenhua and Yanzhou appeared reluctant to offer coal under provisional pricing arrangements.

 

Atlantic prices are being buoyed through the first half of 2004 by firm demand from Europe and the USA and by the threat of reduced exports from Poland. AME predicts that Polish exporters may postpone at least part of their inevitable industry restructuring and mine closures to exploit high international coal prices.

 

Globally, imported thermal coal tonnages rose 10% last year to around 490Mt with demand underpinned by Asian industrial giants Japan, South Korea and Taiwan. But the rate of thermal coal demand increase is forecast to slow this year after a boom 2003, when imports were bolstered by a series of abnormal events that moved both the Atlantic and Asia-Pacific markets into undersupply. The sharp lift in Japan’s 2003 import volumes, for example, will not be repeated this year, as nuclear electricity generation capacity progressively comes back online.

 

AME forecasts international thermal coal trade to grow at an average annual rate of around 2% over the rest of the decade. Foreshadowed environmental taxes will discourage coal use in the EU and Japan from 2005.

 

These countries presently account for around 46% of global thermal coal imports. Stringent EU emission targets and carbon trading arrangements have bolstered the case for gas-fired power generation. Sharp increases in the landed cost of thermal coal also reduced its historic cost advantage over pipeline gas.

 

A new element emerging in the giant US coal industry is a shortage of thermal coal from the Appalachian (eastern) region as coal is diverted to booming metallurgical markets. This is forcing domestic prices up and further encouraging imports, mainly from Colombia.

 

Sustained high US gas prices and relatively relaxed environmental policies are also promoting revived interest in coal-fired power generation.

 

Import coal customers will face higher landed costs of coal through higher FOB prices and record high ocean freight costs. This will accelerate a general movement to secure supply from sources that can offer the lowest landed cost – a trend also encouraged by progressive deregulation and competition between electricity generators.

 

This benefits coal suppliers located relatively close to customers – Colombia and South Africa in the Atlantic markets and China and Indonesia in Asia.

 

While Australia is still comfortably the world’s largest thermal coal exporter, it has lost some share in key Asian markets to both Indonesia and China. Indonesia’s rapid rise in international thermal coal markets will continue in 2004, with exports well in excess of 90Mt. In the intermediate term, exports are expected to plateau as a result of increased domestic demand and the prevailing poor investment climate.

 

China’s total coal exports should decline by around 6% in 2004 as additional coal is directed to domestic markets. Most of the reduction will be in metallurgical coal, with thermal coal export capacity only marginally affected. China has demonstrated an enormous capacity to increase production – total coal output in 2003 increasing 16% year-on-year to over 1.6 billion tonnes!

 

AME expects that increased production will cover most domestic requirements in 2004, allowing thermal coal exports of close to 80Mt.