Spot prices ex Newcastle hit US$42.5/t FOB in mid January, up 72% from US$27.80/t in mid January 2003, and then continued upward to US$43.00/t as the month drew to a close. Newcastle prices have now practically converged with Richards Bay spot prices, which increased to US$42.9/t FOB in mid January and US$43.10/t late in the month.

Steam coal supply problems continue in all three of the major Pacific steam coal exporting countries:

- Chinese coal exports have slowed over the winter months, when domestic coal demand is highest. Even shipments of thermal coal to Japan under the long-term trade agreement have been disturbed.

- Chronic rail capacity constraints continue in the Hunter Valley, with 44 vessels waiting off the Port of Newcastle as of 13 January. Newcastle accounts for 55% of Australian steam coal exports.

- A worse than usual wet season in Kalimantan has restricted Indonesian exports. Asian utilities needing to source coal for prompt delivery are, therefore, competing for a very small pool of available coal.

The Newcastle coal chain is actually putting through more coal than ever, with exports from Newcastle being 6.7 Mt in December, which is 80 Mt annualised. The problem is that the throughput of the coal chain is hitting the wall well below the nominal capacity of the constituent parts. The nominal capacity of the port is 89 Mtpy and the theoretical capacity of the rail system has been quoted as high as 100 Mtpy. Yet exports for the year to 31 March 2004 are only likely to be 74 Mt; not that much higher than the 70.5 Mt achieved in calendar 2002.

The fundamental problem is with the rail track infrastructure. There are some well-defined track upgrades that could go a long way to alleviating the problem, most notably a grade separation near the port that would eliminate one of the worst rail crossings, where coal trains currently have to wait for passenger and other rail traffic to pass. But the Rail Infrastructure Corporation has still not even approved this upgrade. So the chances of the rail system achieving any more than 80 Mt in 2004 do not look so great.

As well as the supply problems from the big three Pacific exporting countries, Russian supply into Asia has also slowed. Through the second half of 2003 Russian steam coal and metallurgical coal was increasingly diverted into the European market, where prices skyrocketed in the middle of last year. The price gap between delivered European and Pacific spot steam coal prices has shrunk substantially since last November, which is likely to stimulate a min-revival in Russian exports into Asia.

Where does all of this leave us in terms of this years Japanese contract prices for steam coal? In actuality the Korean utilities appear to have already beaten them to the punch, with Korea Southern Power having settled with Anglo American for supply out of NSW at ca. US$38/t for calendar 2004. But one Australian supplier, who is noted for his reliable comments on the market, says the reported Korean settlement was “only the Japanese trying to talk the market down”! Korean utilities only belatedly settled CY2003 prices with Australian suppliers last month, at US$26.50/t FOB. Another reliable source notes that the Anglo deal for 2004 was actually completed some time ago, just after the belated 2003 settlement, and the Japanese utilities have just recently decided to ‘leak’ the price in order to hose down producer demands for a price rise of closer to US$40/t. This source said that “if the Korea Southern Power deal was done today the price would start with a four.”

There is still a huge gulf between the price expectations of these utilities and those of their suppliers.While the suppliers are offering contract price levels of US$40/t FOB or more, the utilities reckon that the current spot market surge is just a bubble waiting to burst. The current tightness of the Pacific steam coal market is, indeed, being driven partly by short-term supply constraints, but the Japanese utilities are running out of time for the bubble to burst.

Our forecast for the Japanese fiscal 2004 steam coal price settlement has therefore been increased from US$34/t up to US$38/t FOB Newcastle. This would represent a 42% increase from the current price of US$26.75/t, and would price steam coal at roughly the same as semi-soft coking coal on a dollar per gigajoule basis, assuming the reports that semi-soft prices have increased from US$30.80/t to around US$41/t FOB are correct.

Turning to metallurgical coal, Japanese steel mill contracts are all pretty much finalised, with all coal types – hard coking, semi-soft, and low volatile PCI – seeming to have gone up by US$10 – US$11/t FOB. It now appears that the JSM price for ‘benchmark’ Goonyella hard coking coal increased by US$11/t (23%), from US$46.25 to around US$57/t FOB. While we wait for details of the Japanese price settlements for individual brands to filter out, interest has turned to subsequent settlements in Brazil and India, which look to have moved even higher.

The Indian steel mills have reportedly settled hard coking coal contract prices with the BMA at US$57/t FOB for lower value blended products, which looks to be an increase of over 25% after adjustments for changes in quality. The BMA is also understood to have settled with the Brazilian steel mills at just under US$59/t FOB for premium hard coking coal brands, an increase of 23%.

The major Australian, Canadian and United States coking coal exporters have now practically completed annual negotiations with all of their major customers, apart from a few in Europe. The future direction of the hard coking coal market depends largely on whether the surge in Chinese coking coal imports continues as expected and on the production response of Queensland shippers.