In the latest Coal Trade newsletter, coal research company Energy Economics described the current coal markets as “surreal”. As a global recession looms, steam coal markets have remained remarkably strong.

“This situation brings to mind images of one of those cartoons where the character has already shot off the canyon precipice, legs pumping furiously, but has yet to recognise that he is about to start falling,” the company said.

Energy Economics expects steam coal demand to slow markedly over the next six months, arguing that the recent growth rates in steam coal demand were not sustainable, even if the terrorist attacks had not occurred.

The reasons for changing demand for thermal coal are more related to power station commissioning/decommissioning schedules and relative load factors between the competing generating fuels, at least over the short-to-medium term.

Energy Economics reported a steam coal spot price for Newcastle of US$30.90/t for September, but said this may have gone as low as US$28/t late in the month.

“Discounting is being driven by an increase in coal inventories in the Hunter Valley over the past two months, despite Newcastle exports having recovered to a fairly healthy 6.15Mt in September,” Energy Economics said.

“With weakening demand and continuing strong supply, the slow decline in steam coal spot prices can be expected to continue through into 2002, and we now expect contract prices into Japan to fall by 2–3% next year.”

Prices are expected to remain profitable for producers on an unhedged basis.

The effect of the recession will hit steel-consuming industries hard. The electric arc furnace sector will bear the brunt of the downturn, which will buffer the impact on the blast furnace sector and therefore on coking coal demand.

Coking coal supply is expected to remain tight for the rest of the year, partly due to tightness in rail capacity on the Goonyella line and at Dalrymple Bay. The loss of production because of the Jim Walters No 5 accident has taken a million tonnes per year out of the market

Energy Economics said significant falls in hard coking coal spot/short-term prices will not be seen until early next year, but they will be substantial when they come.

The company revised its forecast for Japanese contract hard coking coal prices for next year back up to US$45.50/t FOB Queensland (+6%).

In related news, UK-based DRI•WEFA’s Coal Service released its annual study of the international seaborne steam coal market. DRI•WEFA expects international trade in seaborne steam coal to almost double from around 350Mt in 2000 to almost 670Mt by 2025.

Nearly all the above increase is set to come from the Asia-Pacific markets. China, in particular, is expected to play a major part, having lifted exports from 33Mt in 1999 to 53Mt in 2000. In calendar 2000 the Chinese accounted for over 60% of the increase in world coal trade, DRI•WEFA said.