The general strike in Venezuela, which has practically halted the country’s exports of both oil and coal, has provided a short term boost to energy coal markets, but probably insufficient to avoid a price fall into Japan next year.
Australian inventories of export coal jumped by 1.7 Mt during October to end the month at 16.7 Mt. This was the highest inventory level for at least seven years. Metallurgical coal inventories increased from 7.1 Mt to 7.8 Mt and steam coal increased from 7.9 Mt to 8.9 Mt.
Meanwhile, coal imports by the top four countries (Japan, South Korea, Taiwan and the United Kingdom) fell marginally in the September quarter, and were down 1% in the nine months to September. Coking coal imports by these countries have, however, recovered following the anomalously low levels in the June quarter, reinforcing the impression that the earlier weakness related to timing and inventory reduction issues. In the nine months to September coking coal imports by the ‘Top Four’ were up 2.1%, which now correlates reasonably well with the increase in blast furnace iron production in coking coal importing countries of 1.9%.
But steam coal imports remained in negative territory for both the quarter and the nine months to September. Despite this, spot steam coal prices have continued to rise, reaching US$24.90/t FOB Newcastle and US$27.40/t FOB Richards Bay by mid December (quite close to our forecast end of 2002 prices of US$24.50 and US$27.50 respectively made back in September). The rise in spot prices is the result of the Northern hemisphere winter starting to bite and WTI Cushing oil prices surging to US$32 per barrel. The rise in oil prices is, of course, the result of further escalations in US- Iraq tension and the Venezuelan strike.
The fundamentals would indicate fairly flat spot energy coal prices ex Newcastle at around currently levels through 2003. But if the United States does attack Iraq all bets are off – a large initial spike in spot prices would be expected followed by a period of high volatility.
Another factor in the spot price equation is the ongoing rise in ocean freight rates – driven by high iron ore shipping demand and an increase in long haul coal shipments from Australia to Asia compensating for weak Chinese (short haul) exports. Capesize rates from Newcastle to Amsterdam have increased 47% from US$9.80/t in mid September to US$14.40/t in mid December.
Increases in freight rates disadvantage Australian steam coal exports to Europe, with Newcastle shippers now paying US$4.10/t more to ship coal to Europe than Richards Bay shippers. This frees up the Richards Bay price to rise further in response to the Venezuelan disruption and winter demand in Europe without stimulating increased Australian shipments to Europe. It would therefore not surprise to see Richards Bay spot prices heading north of US$28/t early in the new year.
