According to the report– Supply Side Renaissance –changes over the last twelve months in the demand/supply balance and ocean freight rates have influenced both FOB prices and customers’ landed costs of thermal coal.
In 2004 Japanese contract prices with Australian suppliers increased by up to 68% with mid-year settlements at around US$55/t up another 20% on the March level. AME questions how long this state of supply dominance can persist as higher returns encourage new mines and capacity expansions to service both the Asia-Pacific and Atlantic markets.
Demand growth in Asian countries will continue to be buoyant with traded thermal coal demand forecast to reach 560Mt per annum by the end of the decade. By 2010, Malaysia will add around 4GW of coal-fired generation capacity, Thailand will have moved to diversify fuel sources and reduce its heavy reliance on gas, and India’s economic growth will demand imports to supplement domestic supply.
AME said China continues to exert fundamental control over supply/demand balances and regional prices.
“Despite recent measures to rein in its burgeoning economic growth and with Chinese coal production now approaching two billion tonnes per year, domestic demand is still placing pressure on export capacity,” AME said.
China’s generation capacity is currently 75% coalfired and official estimates are this needs to increase by around 65% to meet 2010 electricity demand, placing enormous pressure on coal production, with significant implications for export volumes.
In Atlantic markets, increased demand will come from the US and Mexico. US import growth will be sustained by high gas prices and a progressive wind down of domestic supply from the eastern (Appalachian) coalfields.
“Firm prices and strong demand are naturally encouraging mine capacity expansions and new mine developments,” AME warned.
“Indonesia has cemented its position as the world’s second largest thermal coal exporter (after Australia) with exports forecast to approach 100Mt this year. In the Atlantic region, the Colombian export industry is also in a strong growth phase, assisted by low costs and proximity to US and European markets.”
With major Asia-Pacific and Atlantic region export coal chains now operating at near capacity short-term production boosts are unlikely to swing markets into oversupply.
AME said the largest export coal companies (BHP Billiton, Xstrata, Anglo American, PT Bumi and Rio Tinto) are slowly increasing their influence over international thermal coal trade. The top ten companies (excluding those operating in the former Soviet Union) currently control over 45% of world export production.
International trade patterns are still being influenced by high ocean freight costs, with average time charter and spot rates doubling over the past twelve months. This has regionalized thermal coal trade and further increased the landed cost of coal.
Security of supply has emerged as a major issue for coal customers, a consequence of the current undersupply. AME predicts a drift back to term contractual arrangements in order to secure tonnage next year, reversing the trend to spot and tender buying possible in an oversupplied market.
Environmental issues are expected to affect the position of coal in some key markets such as Japan and the European Union. Japan’s thermal imports have increased by over 20Mtpy since 2000 but are now expected to decline slowly through the second half of the decade as government policy favours nuclear generation. In the EU, the problem for energy planners is compounded by nuclear phase-out deals.
In the short term, however, sustained high gas and oil prices will reinforce coal’s position as the main alternative for electric power generation, AME said.
