Today’s steam coal market is one of huge contrast between the recession-blighted traditional demand centres of the Atlantic and the Pacific and the booming import growth being seen in China and India. Were it not for the latter, says McCloskey’s Steam Coal Forecaster, the international market would have experienced its worst slump ever. Instead it is experiencing a minor adjustment, with overall demand fairly flat at 607mt in 2009. Looking to 2010, the same contrasts look set to prevail, with the Indian market especially set to expand.
By the end of July, Chinese imports had already expanded by 18mt, and IHS McCloskey continues to receive intelligence suggesting that a surge of Indonesian supplies to China could come in to boost arrivals to beyond 40mt in Q4, with some estimates as high as 70mt; while this seems unlikely it is conceivable that something approaching 50mt is possible.
Alongside the Chinese import boom, but looking even more secure in its outlook, is India’s import surge. This is not a product of the ultra-mega power station building programme, which will not impact upon requirements before 2011, but of India’s desperate coal shortage and the government’s attempts to encourage greater importing. In addition, India’s buyers like today’s prices. They were already trying to raise their intake of foreign coals even when prices were approaching their peak in 2008, so the post-collapse price level is very attractive to them. Apart from the credit risk, there is every reason to expect India’s imports to continue expanding.
Outside China and India, the demand picture has been unremittingly grim with imports expected to fall in 2009 by 14mt in Europe, by at least 8mt in the US and by 15mt in Japan. In all cases, the cause of the decline has been the combination of a recession, cuts in power requirements and inter-fuel competition. Huge gas bubbles dominate the European and US electricity economies and will take at least a year to clear. IHS McCloskey’s colleagues at IHS Energy Insight forecast no recovery in gas prices in either market before the end of 2010.
Next year should see some recovery in demand in the Atlantic and in the leading Asian consumers, but there is considerable risk to this from this year’s build-up of power station stockpiles. These are expected to be sustained in Europe and the US through 2010, and in Europe for as long as the forward market remains in contango. However, there will be stockdraw at some time in the mid-term future and this will be a major drag on any future recovery, with the UK market the worst example of this in Europe.
There is also less certainty about the sustainability of the current Chinese growth than there is about expectations of Indian import expansions. China’s import growth has been a product of relativities between internal prices for domestically produced coal and international ones. For much of the first half of 2009, this price relationship has been in favour of imports; generators have rushed to buy, first from Australia and more recently from Indonesia and, most recently on a small scale, South Africa. Should this relationship be sustained, Chinese imports can be expected to continue expanding. However, a switch of the relationship to a more traditional role, with Australian CIFs into southern China, including tax at 17%, rising above internal Chinese trends, will lead to a decline in requirements.
The interesting thing to watch is the chart of that relationship. Until late last year, Australian CIFs were well above internal Chinese prices and there was little incentive for the generators to import. Then Australian, in line with other international, prices slumped to below parity with Chinese ones and, roughly half a year later, the imports began to flow. The burst of buying then brought a rise in Australian prices, which now appear to be running in tandem with Chinese internal values. This phenomenon has only been in place since last winter, and it will be interesting to see if it is broken by a return to normal trading levels, but it does look as if the steam coal market has a new relationship to watch in its search for pointers to the future.
The huge changes being seen in demand are driving sweeping alterations to the pattern of supply, which means big changes for the shipping sector. Capacity is being drawn from the Atlantic, where the demand is weakest, to Asian/Pacific markets on a scale not seen before. The impact of this is most noticeable in South Africa, where eastbound shipments have climbed from just 10% of the overall supply to almost 50% in three years. However, it can also be seen in an increasing Russian focus on their Asian ports and in an accelerating withdrawal of westbound exports from Indonesia.
Meanwhile, what of those suppliers that cannot divert supplies? US export prospects are caught up in the maelstrom of the imploding US coking and steam coal markets and mining companies may be more likely to cut production anyway, but the outlook for Colombian exports, focused as they are on the US and Europe, can only be bleak. Colombia’s first half-year proved surprisingly robust in the face of collapsing US demand, but all producers are finding the second half-year much more difficult, with little respite offered in H1 2010. For the moment, the Colombians are soaking up volume cuts but, with a government anxious to see coal royalties sustained, how long will it be before they cut prices to win market shares?
The switching of South African supplies to India should, on reflection, be unsurprising. Indian buyers have a recent history of paying relatively high prices, as evidenced by RBCT spot prices relative to European levels, while the quality problems some South African coals have in Europe are not an issue in India. As the nearest source of high-cv steam coal to India, South Africa’s exporters have always been well-placed to take advantage of Indian demand growth.
From January to August 2009, with the European market moribund and the Indian one booming, South African exports to India grew by 8.1mt to 13.4mt while, with shipments to Taiwan also on the up, overall eastbound exports grew by 9.3mt to 19.4mt, almost half of South Africa’s exports.
The withdrawal of Pacific supplies from the Atlantic market has been less pronounced than the South African switch but is becoming significant. In the case of the Indonesians, however, the retreat has been accelerating since Q1 as customers in Italy, Slovenia, the UK and the US, among others, have cut their needs. By the end of H1, Indonesia’s exports to the West were down almost 4mt, at 8.4mt.
In the Pacific, meanwhile, the story is one of replacing Chinese tonnes and of underperforming Indonesians. While one of these, the changes in Chinese supply, may well be a permanent feature of the market, the other looks as though it is being reversed through a much stronger second half-year performance.
Chinese exports have fallen by more than half this year in a decline which is expected to take 16mt out of the market in 2009. This has resulted from the same price relativities that have been driving Chinese imports up and, although China’s main markets have also seen declines overall, it has left a gap in the market which Australian suppliers in particular have been quick to fill. Apart from 1mt, all of the loss in Chinese supply has been to Pacific markets.
Where the Australians have been quick to take advantage of the loss of Chinese exports and the growth in Chinese imports, the Indonesians have lagged behind so far in 2009. A combination of the financial crisis, credit crunch and difficult mining conditions early in the year led to H1 exports being 13mt down overall. However, in Q2 the year-on-year decline began to be reversed and Indonesia’s exporters make a compelling case for a substantial second half-year rebound to take the full 2009 figure into growth. To achieve this, the major Indonesian suppliers have to crank up output, which they say they are doing, and they have to find markets, and India and China both look set to take big volumes in the rest of 2009.
A final part of the supply picture for the rest of 2009 is Australia and its infrastructure. Steam coal has been able to flow without hindrance in the first half of 2009 and exports have boomed. However, since Q2 coking coal demand has been rising, spurred primarily by huge and unexpected Chinese demand growth, and looks set to be followed by a more general market reawakening. Coking coal prices are already rising rapidly and this higher value business will take precedence over steam coal shipments, and indeed has already started to do so.
Text: David Price, McCloskey