At the 5th annual McCloskey Coal Forecast Conference 2001, held in Brisbane from November 29-30, delegates gathered to hear a range of views on where coal prices where headed.
Thermal coal
Forecasters predicted that growth in thermal coal demand would reach a new high in 2001, underpinned by tight market conditions and supply side problems. By some estimates demand over the next two years could rise an extra 40 Mt. While China met most of the market shortfall in 2000, it is unlikely to continue doing so due to infrastructure limitations and the need to divert more tonnage to domestic markets. Russia, believed capable of supplying up to 26 Mt of thermal coal in 2001 (16 Mt in 2000), could possibly plug the gap left by China.
Gerard McCloskey, managing director of McCloskey Coal Information Services, currently expects the benchmark thermal coal price to rise 7% in 2001 and 4% in 2002. Thermal coal demand is expected to rise by 24 Mt to 346 Mt, however, supply is expected to rise by only 21.5 Mt, thus creating a market deficit in 2001 and generating a possible price increase.
UK-based commodity strategist with Macquarie Bank, Jim Lennon said steaming coal benchmark prices should increase by $US2.00 a tonne from the present benchmark price of $US28.75 a tonne, but the spot market would continue to surge with an expected undersupply of around 40 Mt demand in the next two years.
Lennon said mounting evidence of a slowdown in the U.S. economy and signs of emerging weakness in parts of Asia and Europe would see world growth slow from 5% to below 4% in 2001 and to 3.3% in 2002.
Coking coal
Benchmark contracts are expected to increase US$2.50 a tonne (or 7%) for hard coking coal while semi-hard and semi-soft would see average gains of about US$3.50 a tonne. Despite easing demand from steel mills in 2001, the market is expected to remain tight and be affected by ongoing supply-side disruptions. These include ongoing mining problems; synfuel subsidies in the US; and how rapidly the Chinese can increase coking exports.
The Japanese benchmark for hard coking coal is presently US$39.75 a tonne, after losing about 30% over the past three years.
Steel production has risen from a low of 777 Mt in 1998, to 788 Mt in 1999 with production this year expected to be close to 845 Mt. Lennon said actual Japanese steel production for 2000 of 106Mt had far exceeded earlier forecasts of 94Mt.
“We are ending a year of record demand, which was not predicted,” Lennon said.
Coking coal demand is likely to remain steady despite declining steel production. While steel and pig iron production in 2001 is likely to fall, this does not necessarily translate to lower coking coal demand.
Lennon predicted a downturn in steel demand lasting through the first half of 2001, followed by a pick up in the second half once destocking was over. But he warned that latent capacity in Australia, Canada and the US could affect the outlook for coking coal producers. Major export coking coal producers, BHP and Fording, are each able to switch on 3 – 4 Mt of latent capacity within a few months, and perhaps double that figure with minimal capital expenditure over a six to twelve month timeframe.
He said producers were facing key questions of whether they maximised short term price gains in favour of a long term strategy to ensure industry profitability.
"BHP is more interested in sustained profitability through the cycle and the message we take from that is they don't want prices to rise that much over the next couple of years because they don't want to encourage a reactivation of capacity," he said.
According to BHP, the coking coal market is likely to be closely balanced in 2001 with supply surplus of just 1-2 Mt.
Summary of various other speakers:
According to Gerard McCloskey, strong demand for both hard coking and steaming coal will see coal prices continue to rise in the first quarter of 2001.
He said global consolidation of coal producers had caused supply shortages, and strength in the Japanese steel industry would continue to support demand for hard coking coal. The coking coal market had been supplied by large volumes of Chinese exports.
However he said growing production in China, Russia and Indonesia may affect prices next year.
BHP Coal manager market intelligence and analysis Dr Neil Bristow said the intense pressure to lower costs was leading to reformulation of coke blends with changes in the value of key coals. There was a growth in preference to mid to lower-mid volatile coals with high coke strength and low ash. Australia is expected to be a likely beneficiary of these trends.
Bristow said there were significant uncertainties in both the demand and supply sides for the 2001 year but predicted the overall supply-demand balance to remain similar to that seen at the end of 2000.
Pacific Coal's managing director, Brian Horwood, predicted improving future prospects for thermal coal. Pacific Coal parent, Rio Tinto, expected demand for seaborne thermal coal to grow from 330 Mt this calendar year by 3.9% a year to 400 Mt by 2005 and by 2.8% a year to 460 Mt by 2010.
Horwood said this demand was due to growth in the number of Asian power stations planned and commissioned. Rio Tinto forecasts growth in Asia of about 6% a year to 2005 and about 3% a year beyond 2005, based on power stations planned and commissioned at the end of 1999.
"Forecasts out to 2005 hold a high level of security as the majority of the generating facilities are already under construction or financially committed," Horwood said.
Australia would continue to be the dominant supplier of coal for the thermal trade, providing 105 Mt by 2005 and 120 Mt by 2010 compared with 88 Mt in 2000. Another 40 Mt would be needed from new mines to meet demand in 2010 and replace exhausted mines.
But he said no new major thermal coal mines were being built in Australia and there was little prospect of new capacity coming on stream before 2005, with a similar pattern seen around the world.
"I remain confident that suppliers and consumers will collectively be able to manage the risk of bringing these developments to the market as they have done over the last two decades," he said. "This will involve a return to the pricing levels that justify the required investment."
