It was the sound of steam coal exporters letting out a collective sigh of relief as steam coal spot prices turned the corner and started to firm.

Richards Bay spot prices bottomed at US$20.20 per tonne FOB on 19 July and had increased a full 8% to US$21.80 by the end of August. Newcastle prices continued to fall for a while longer to a low of US$21.60/t FOB in the week ending 16 August, but raised a notch to US$21.70 in the following week.

Our forecast of last month that spot prices would rise to US$24/t FOB by the end of the year, at both Richards Bay and Newcastle, is now looking quite solid, although it is still quite a big call given that Global Coal's forward curves still show early 2003 prices of around US$22/t.

The differential between spot prices at Richards Bay and Newcastle provides significant insight into the relative strengths of the Pacific Rim and Atlantic steam coal markets. Usually FOB prices ex-Richards Bay are two or three dollars higher than that at Newcastle. This is because usually there is a net flow of steam coal from the Pacific into the Atlantic, and in particular from Australia to Europe.

Australian coal exporters currently pay US$3 more in ocean freight into Europe than their South African competitors, so to achieve a similar delivered price into Europe Australian FOB prices usually need to be two or three dollars lower than South African FOB prices.

The net coal flow from the Pacific to the Atlantic results from three of the top four steam coal exporting countries (Australia, China and Indonesia) being located in the Pacific whereas Europe and the East Asia still account for around 40% of world steam coal imports.

Over the past six months this "normal" relationship was turned upside down, with Richards Bay spot prices falling well below Newcastle prices. What this indicates is that European markets were satiated over this period by steam coal supply from within the Atlantic basin and term contract supplies from elsewhere - the result of weak demand in Europe and North America and, to a lesser degree, by progressive increases in supply from countries such as Colombia and Russia over recent years.

The relationship is now reverting back to normal, with RB prices having risen to equal Newcastle prices by late August. Our expectation that this would be the case is the reason that our forecast end of year spot prices for Newcastle and Richards Bay were equal. The spot price recovery may stall through the northern autumn, but a quite strong upward trend is expected through winter and on through the first half of 2003.