Thermal coal

Rebecca Petchey

Contract prices decrease significantly in 2009

In March 2009, the contract price for thermal coal between Australian suppliers and Japanese power utilities was settled at around US$70 to US$72 a tonne for the Japanese fiscal year 2009 (JFY, April to March), which was a 44 per cent decrease from JFY 2008. The fall in contract prices reflects falling electricity demand across Asia and expansions to export capacity in major regional coal suppliers such as Australia and Indonesia. Despite the significantly lower settlement, contract prices for the JFY 2009 in real terms remain the second highest since JFY 1986.

In late June, the spot price for Newcastle thermal coal exports was $71 a tonne. This is 65 per cent less than the record price of $201 a tonne traded in July 2008 at the peak of the commodity price cycle. Over the past five years, coal producers have increased production and export capacity in response to higher prices. Falling electricity demand associated with the global economic downturn has resulted in lower thermal coal import demand, which in turn has created excess capacity, placing downward pressure on prices. However, recent import demand from China and India has provided some support for prices.r, recent import demand from China and India has kept prices from falling to less than US$60 a tonne.

World trade to remain constant

World thermal coal trade in 2009 is forecast to remain steady at around 700 million tonnes. In 2009, Japanese and European electricity demand, and hence thermal coal imports, are forecast to fall, reflecting the effects of the global economic downturn. However, this is expected to be largely offset by increased imports into China, India and the Republic of Korea.

Thermal coal trade is forecast to increase by 3 per cent to 723 million tonnes in 2010, reflecting the assumed economic recovery in Asia and Europe by that time.

Japan’s imports to decrease

In 2009, Japan’s thermal coal imports are forecast to fall by 14 per cent to 115 million tonnes. This forecast decline reflects falling electricity consumption associated with economic contraction. Thermal coal is primarily used in electricity generation. The fall in demand for electricity in the first quarter of 2009 contributed to the decrease in imports, as highlighted by a build-up of stocks at Japan’s 10 largest power utilities.
The recent restart of several nuclear power plants in Japan – including Kashiwazaki-Kariwa no. 7, Ohi no. 4 and Hamaoka no. 5 – has also contributed to the decline in output from coal-fired power stations and, hence, thermal coal import demand.

Japan’s thermal coal imports are expected to remain around 115 million tonnes in 2010, reflecting subdued economic growth prospects.

In the Republic of Korea, increases in thermal coal imports in 2009 are expected to be supported by the completion of new coal-fired electricity generation capacity in late 2008 and early 2009. The growth in imports is expected to occur despite falling electricity demand and could result in thermal coal increasing its share of electricity generation. The increased share of coal-fired electricity generation in the short term reflects its cost competitiveness compared with other fuels such as nuclear and gas. Imports are forecast to increase by 2 per cent to 75 million tonnes in 2009 and a further 5 per cent to 79 million tonnes in 2010.

India is expected to be one of the fastest growing thermal coal importers in 2009. New generation capacity commissioned in late 2008 and early 2009, and requests by the Indian Government for electricity generators to increase stocks to enhance the security of supply, will support this growth. Imports are forecast to increase by 18 per cent to 40 million tonnes in 2009 and by a further 18 per cent to 47 million tonnes in 2010.

Imports by the European Union to decrease

Falling thermal coal demand in a number of countries in the European Union will be partially offset by declining domestic production, which will support imports. For example, thermal coal production in Germany, the United Kingdom and Italy has been decreasing, reflecting relatively high production costs. This has led to an increase in imports over the past six years. However, across the continent, economic contraction is expected to result in lower electricity output and, hence, thermal coal demand. The net effect is that imports are expected to fall by 3 per cent to 187 million tonnes in 2009.

China’s imports to increase

China’s imports of thermal coal are forecast to increase by 6 per cent to 36 million tonnes in 2009. A fall in the international price of coal and lower freight rates have increased the competitiveness of imports relative to domestic production. The majority of coal imports have been destined for the southern coastal areas, which are distant from the major coal producing regions in China’s north. In addition, coal production at a number of small and medium sized mines was halted as a result of safety issues. For the remainder of 2009, growth in China’s thermal coal imports is forecast to slow as a result of expected higher freight rates and increased production from large coal producers such as Shenhua and China Coal.

In 2010, China’s imports are forecast to increase by a further 11 per cent to 40 million tonnes. Economic growth in China is assumed to strengthen in 2010, resulting in increased demand for electricity. Construction of new coal-fired generation capacity in 2009 and 2010 is expected to support this increase in demand.

China’s exports to decrease

China’s thermal coal exports are managed by a quota system, where licences are allocated to coal exporting companies on an annual basis. This mechanism allows the government to control the volume of coal exported. The first block of export licences for 2009, released in December 2008, was for 26 million tonnes. A second block of licences is expected to be released later in the year.

In the first quarter of 2009, China’s coal exports decreased by 25 per cent to 7 million tonnes compared with the same period in 2008. The fall in exports reflects weaker domestic production and falling international spot prices. In 2009, China’s exports are forecast to decrease by 6 per cent to 40 million tonnes. Exports are forecast to decline by a further 1 per cent to 39 million tonnes in 2010.

Export capacity expansions to meet demand from China and India

In 2009, increased thermal coal supply from Indonesia is expected to offset lower exports from Australia, Colombia and South Africa.

South Africa’s exports in 2009 are expected to remain around 68 million tonnes because of weak demand in the Atlantic market. In 2010, exports are expected to increase by 3 per cent to 70 million tonnes. This will be supported by the completion of the Phase V expansion project at the Richards Bay Coal Terminal.

In 2009, Colombia’s exports are expected to remain at approximately 69 million tonnes. This reflects weak demand in the Atlantic market, where the majority of Colombia’s coal is sold. Exports are forecast to increase to 74 million tonnes in 2010 as demand rebounds in the United States.

Exports from the United States are expected to decline by 28 per cent to 25 million tonnes in 2009. The United States is considered to be a swing supplier of coal in the Atlantic market, filling in any supply shortages. With ample supply available from South Africa and Colombia over the forecast period, US exports are forecast to decrease by 5 per cent to 24 million tonnes in 2010.

Indonesia’s exports are forecast to increase by 3 per cent in 2009 to 203 million tonnes, and by a further 4 per cent to 212 million tonnes in 2010. Higher exports from Indonesia will mainly be sourced from increased production capacity at existing mines, as uncertainty created by a new mining law is affecting investment in new mines. Given the dominance of road transport, lower fuel prices have improved the economic viability of mine expansions, even in the face of rapidly falling prices.

Australia’s production to increase in 2008-09

In 2008-09, Australia’s thermal coal production is estimated to increase by 8 per cent to 201 million
tonnes. The completion of a number of mines in the past 18 months, including the Liddell coal upgrade, Rocglen and Abel underground, has supported this increase. Weak demand from Asia is expected to support a decrease in production by 5 per cent to 191 million tonnes in 2009-10.

In 2008-09, the volume of Australia’s thermal coal exports is estimated to increase by 13 per cent, to 131 million tonnes. The increase in exports has been driven by strong demand for coal in the second half of 2008. In 2009-10, Australia’s exports of thermal coal are forecast to fall by 6 per cent to 123 million tonnes. The fall in exports reflects weak demand from major trading partners, particularly Japan.

Earnings from thermal coal exports in 2008-09 are estimated to increase by 110 per cent to $A17.6 billion. Contributing to this increase were record prices and large export volumes associated with strong demand in the early part of the year. With the decline in contract prices for JFY 2009 and weak demand, export revenue is forecast to decline by 44 per cent to $A9.8 billion in 2009-10.

Thermal coal outlook
			2008	2009	f	2010	f	% change
World
Total trade		Mt	714.5	700.8		722.6		3.1
Imports
Asia		Mt	387.8	374.9		395.1		5.4
– China		Mt	34.0	36.0		40.0		11.1
– Chinese Taipei		Mt	60.3	59.0		62.0		5.1
– India		Mt	34.0	40.0		47.0		17.5
– Japan		Mt	133.0	115.0		115.0		0.0
– Korea, Rep. of		Mt	73.5	75.0		79.0		5.3
– Malaysia		Mt	16.5	15.0		16.9		12.7
– other Asia		Mt	36.5	34.9		35.2		0.9
Europe		Mt	233.5	226.9		225.1		– 0.8
– EU 27		Mt	193.4	187.0		185.2		– 1.0
– other Europe		Mt	40.1	39.9		39.9		0.0
Other		Mt	93.2	99.0		102.4		3.4
Exports
Australia		Mt	126.4	122.0		130.0		6.6
China		Mt	41.8	39.5		39.0		– 1.3
Colombia		Mt	68.7	69.0		74.0		7.2
Indonesia		Mt	198.0	203.0		212.0		4.4
Russian Federation		Mt	80.0	75.0		75.5		0.7
South Africa		Mt	67.0	68.0		70.0		2.9
United States		Mt	34.9	25.0		23.8		– 4.8
Other		Mt	97.7	99.3		98.4		– 0.9
			2007-08	2008-09	s	2009-10	f
Australia
Production		Mt	185.1	200.5		190.7		– 4.9
Exports		Mt	115.1	130.5		122.5		– 6.1
– value		A$m	8 365	17 589		9 815		– 44.2