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COVID-19: Global coal demand to take major hit, while S. Africa halts exports

27 March 2020 

The COVID-19 pandemic could slash global coal import demand by more than 80 mt this year, while the supply picture took a hit on Friday by the temporary loss of South African exports as the country started its 21-day lockdown.

An IHS Markit analysis forecast thermal coal imports to decline by around 65 mt, while intake of metallurgical material could shrink by 14-15 mt this year.

The key factors driving this drop are the oversupplies in the domestic Chinese market, coupled with the expectation of a significant fall in intake from South Asia and South East Asia, said James Stevenson, research and analysis director for coal at IHS Markit.

Chinese imports are expected to fall around 20 mt, while India could see a 15 mt drop. European imports will likely fall around 17 mt, though a large decline had already been expected before the COVID-19 outbreak.

In 2019, the global seaborne thermal market totalled 1.034 bnt versus demand of 1.028 bnt, according to IHS Markit data.

Recent curtailments from South Africa, Colombia, and the United States are a start, but larger reductions will be needed on the supply side to balance the market, Stevenson noted.

South Africa’s 21-day lockdown begins

South Africans woke up to a complete lockdown on Friday, the first day of a three-week period where only essential services can operate as the country battles to stop the spread of COVID-19.

Richards Bay Coal Terminal (RBCT), which exported 72 mt last year, has been forced to shut its operations during the lockdown, potentially removing as much as 4.2 mt from the seaborne market over the 21-day period.

RBCT has asked the government for an exemption that would allow the country’s largest coal export terminal to resume operating, but it isn’t clear when a decision will be made on its request.

Rail shipments to RBCT have stopped for now, industry sources said. A Transnet source said RBCT railings would not resume until exporters are granted government exemptions for shipments to restart during the lockdown, which lasts through 16 April.

At least one miner, Anglo American, said on Friday it would continue producing albeit at a 50-70% reduction. It anticipates the impact to its thermal exports will be 1.5-2.0 mt for the year. Anglo exported 17.80 mt last year from its South African mines.

The miner didn’t say what it would do with its export coal during the lockdown. It could stockpile the material at its mines or potentially rail it to RBCT.

If exporters are granted the exemptions to rail to RBCT, but the terminal remains closed, then stockpiles could surge from their current 3.65 mt. The terminal has a capacity to hold more than 8 mt.

Transnet railed 71 mt to RBCT last year, which theoretically could mean an extra 4 mt being stockpiled at RBCT during the three-week lockdown. But mines and rail services are expected to be drastically reduced, so a small fraction of that volume is much more likely.

Also, it isn’t clear how the coal would be stockpiled at RBCT if the terminal is shut and there are no workers.

“Transnet will continue to transport coal as long as there is demand and availability of the coal railway line,” the rail operator said in a statement on Friday.

The rail operator will also continue transporting coal to Eskom power stations since those mines can operate during the lockdown.

Despite the loss of South African supplies, Indonesian coal producers were finding little demand for their coal.

“Even with reduced supply from South Africa, Colombia, and even domestically in China and India, there is little support for prices as demand is so weak,” a source from a producer of Indonesian sub-bituminous coal said.

 © 2020 IHS Markit®. All rights reserved.


Glencore suspends, Drummond reduces Colombian production

24 March 2020 | McCloskey Coal Report 

Both Glencore and Drummond are joining Cerrejón in curtailing and suspending production from their Colombian mines in repose to the COVID-19 threat.

Glencore announced this afternoon that it will suspend mining starting 25 March at its Prodeco thermal coal operations.

“Prodeco will transition to care and maintenance (C&M) on 24 and 25 March 2020,” according to the company’s statement. “The port will continue to operate until existing stocks are depleted.”

Prodeco added: “Although the Presidential decree has exempted mining from the national 19 day quarantine to try and minimize the spread of COVID-19, growing community tensions and restrictions on logistics have made it difficult to ensure the continued and safe operation of the mines, and have put our host communities at risk of violence.”

Drummond is putting a contingency plan in place to reduce mining as it assesses the health and safety implications of the virus.

It is understood that some buses that transport workers have been blocked the over the last few days by communities living close to Pribbenow and Calenturitas mines in response to concerns over COVID-19.

As reported earlier today, Cerrejón was the first of the Colombian majors to announce that it was curtailing production. At the time it was not known if it was a reduction or suspension, but it now seems that the miner is suspending production.

 © 2020 IHS Markit®. All rights reserved.


Glencore warns on Prodeco; to exit Colombia by 2035

18 February 2020 | McCloskey Coal Report 

Swiss-based commodities producer and trader Glencore warned that it is assessing its Prodeco thermal coal operations in Colombia and would exit the country by 2035, in light of depleting reserves and hefty writedowns.

“We continue assessing Prodeco. If they continue losing cash, and if we don’t see a turnaround in coal prices in Europe, then we have to make a strong decision and see what we do there,” Glencore CEO Ivan Glasenberg said in a conference call after delivering its 2019 results on Tuesday.

The giant Cerrejón mine in Colombia, in which Glencore holds a one-third stake with BHP and Anglo American, "makes money, it produces 30 mt and its cash costs are a bit lower. Its contracts are not only into Europe," Glasenberg said.

However, Glencore will not be producing coal in Colombia after 2035, in line with the "natural depletion" of its resource base in the country, the company said.

Glencore's concession in La Guajira department expires in 2034, while those in Cesar department run out in 2035 and those in La Jagua extend only to 2031, according to Colombian sources.

“South Africa will also decrease but Australia has high quality reserves and we will keep producing there,” Glasenberg said.

However, he added that for the time being: “The coal business continues to perform well right now and continues to stay in operation.”

Glencore booked $2.84bn in impairment charges over the year, of which its Colombian coal assets accounted for around $1bn.

“The writedowns are post tax and Colombian coal is $1bn of that, half across Cerrejón and half across Prodeco. That coal is primarily getting into Europe, pricing at API2 where it's competing with low gas prices. The economics are not adding up. Colombian are not long-life assets like Australia and South Africa,” Glencore’s Chief Financial Officer Steve Kalmin explained.

The Prodeco operation was impaired by $514m, along with an inventory write down of $41m to its estimated recoverable amount of $778m, the company noted in its preliminary results.

Prodeco’s production was 15.6 mt last year, 3.9 mt higher than 2018, reflecting additional mine development. Glencore’s share of Cerrejón’s production was 8.6 mt in 2019, 1.6 mt lower than in 2018, primarily reflecting constraints on production to limit dust emissions, the company said.

The company said it will maintain its 150 mt cap on coal production. Total coal output guidance for 2020 remains at 139 mt, plus or minus 4 mt. Overall production grew 8% in 2019 to 139.5 mt, mainly reflecting the gains from Hunter Valley Operations (HVO), acquired in May 2018, and Hail Creek, bought in August 2018.

Australian thermal and semi-soft output stood at 79.2 mt, a 9% increase from 2018, buoyed by HVO and Hail Creek.

Australian coking coal production reached 9.2 mt in 2019, up 23% or 1.7 mt.

Glencore's coking coal assets in Australia saw earnings before interest, tax, depreciation and amortization (EBITDA) increase 18% to $793m in 2019.

The company’s total EBITDA, however, fell 26% to $11.6bn on lower prices for its main commodities – copper, thermal coal and zinc. Revenue from its own coal production was down 10% on the year at $10.1bn. The company's trading arm recorded adjusted EBITDA of $2.4bn, flat year on year.

However, the writedowns on its coal, oil and copper assets contributed to the company posting a net loss of $404m last year, against a profit of 3.41bn in 2018. Glencore last reported a loss back in 2015.

Virus watch

The company is monitoring the impact of coronavirus outbreak in China and said it was too early to assess the exact impact. There had been no cancellation of coal shipments or delays in letter of credit, it said.

In terms of coal consumption in the Atlantic Basin Glasenberg said, “The amount of coal being consumed in the Atlantic is decreasing, right now, seaborne coal demand is about 70 mt and I don’t see a big recovery and it will continue to decrease.”

“Global seaborne thermal coal demand was characterised by continuation of the strong growth trend in Pacific markets and demand decline in the Atlantic, principally Europe," the company said in its filing.

"This trend was accelerated by surplus global LNG supply, resulting in enhanced competition from low spot gas prices in European markets.”

Successor

Glasenberg spoke about the change of guard at the company during the conference call, noting it was working on bringing through a fourth generation of leaders.

“There will be a few senior changes coming. As I have said, once the new generation is in place and ready to move on, it will also be time for me to move on.”

He added the board was looking at various individuals in the group for the leadership position.

In the past analysts have suggested leading contenders to succeed to Glasenberg are Gary Nagle, head of coal assets; Kenny Ives, head of nickel operations and Nico Paraskevas head of the copper business.

Glasenberg announced his plan to retire in 2018.

 © 2020 IHS Markit®. All rights reserved.

Coronavirus, low freights open window for Colombian to China

12 February 2020 | China Coal Daily

The impact of the coronavirus epidemic on domestic coal production in China, coupled with weak freight markets, have lifted demand for Colombian thermal coal in China and India in the past two weeks.

Colombian prices are currently $48.00-50.00/t FOB, basis 6,000 kc NAR, with delivered prices into China at $69.00-71.00/t, according to market sources.

That compares with last week’s IHS Markit assessment of $81.31/t CFR South China for 6,000 kc NAR material, typically sourced from Australia. Buyers are demanding hefty discounts for Colombia in part to reflect the longer voyage times and ensuing price risk. It takes 65 days for a ship to steam from Colombia to China, versus 20 days from Newcastle to China.

Colombian exporters are understood to have sold at least three or four cargoes into China directly and at least two others through traders, potentially amounting to just short of 1 mt in the first six weeks of 2020, sources close to the matter said.

Colombian thermal coal exports to China rose to 1.82 mt last year, from 0.33 mt in 2018, while shipments to India increased to 1.20 mt in 2019, from 0.35 mt in 2018.

 © 2020 IHS Markit®. All rights reserved.

China eyes more thermal imports as coronavirus tightens domestic supply

12 February 2020 | McCloskey Coal Report 

Chinese buyers are showing a heightened interest in thermal coal imports in the wake of the coronavirus outbreak - with domestic supply tight and rising in price, while transportation remains a challenge too.

Almost half of China's thermal coal mines remain closed, the National Development and Reform Commission (NDRC) stated in a press conference on Tuesday, citing a figure of 57.8% as having reopened.

Most of the private thermal coal mines across major producing regions are still shuttered as of Wednesday, mining sources said.

The supply-demand picture in China looks set to be complicated further in the coming days with snow forecast for vast parts of the north by Friday, likely stoking coal consumption.

Nonetheless, NDRC also urged companies in key sectors - including energy, pharmaceutical, and logistics - to reopen and vowed more initiatives for companies facing difficulties in buying raw materials.

These companies have rising domestic thermal coal prices to contend with, as 5,500 kc NAR material was priced at RMB573/t ($82.27/t) FOB Qinhuangdao (QHD) at the end of last week, up RMB10/t ($1.29/t) on the week, according to figures from the China Coal Transportation and Distribution Authority (CCTD).

Transactions for 5,000 kc NAR material edged up by the same amount to RMB511/t ($72.86/t) FOB, rising RMB9/t ($1.14/t).

By comparison, imports were looking attractive, with Australian high-ash material offered at $55.50-58.00/t FOB for March loading Capes, while Indonesian low-rank was offered at $38.00/t FOB for 4,200 kc GAR on Tuesday for a March loading Panamax.

“Inland power plants have relative lower stocks compared with their coastal power plant peers," said one domestic coal trader.

"As they ramp up purchases, they have pushed up domestic spot prices at mines. Spot prices at ports have risen at a slower pace than inland coal mines because of limited demand from coastal plants,” they added.

Consumption by the major coastal power generators stood at 0.37 mt/d on Tuesday, flat to the previous day. Meanwhile, the total inventory at major coastal power stations was 16.88 mt as of yesterday, higher than the 16.57 mt reported two days earlier, and enough for 45 days of consumption.

Despite the growing allure of imports for some, Beijing has given no indication to Chinese buyers that it will stand down from the vigilance over volumes from overseas which it has exerted in the last two years.

In fact, one southern China based power plant manager said they have been repeatedly warned that imports are still being heavily managed, with certain port officials said to have directed them to get clearance elsewhere.

The country has been using various curbs to tame growth in coal imports since 2017, as part of its anti-pollution campaign and partially to protect domestic miners’ interests.

Most Chinese ports have banned non-local companies from seeking clearance approvals, a measure to help the government keep track of real import volumes, sources said.

Coking coal shows resilience

Signs were emerging that the international coking coal market may be able to weather some of the coronavirus storm.

“All March shipping schedules to Chinese buyers have been confirmed with no cancellations. In fact, we have received enquiries for additional coal from end-users in China,” a coking coal miner from Australia said.

However, China's steel producers are still struggling with record inventory of products.

“Steel products inventory is very high and sales still very poor," a source at one Chinese steel mill said.

I am still worried about the impact of the coronavirus," they added. "We should be careful on raw materials purchasing."

Many of China's coking coal mines, most of which are in Shanxi province, remain closed.

China’s top metallurgical coal miner Shanxi Coking Coal Group had 20 coal mines out of its 107 mines operating as of 10 February, while another 58 remain shut.

Details of the other domestic mines that have reopened can be found in China Coal Daily.

Further coverage of the coking coal and steel situation in China can be found in IHS Markit's dedicated daily metallurgical coal publication Inside Coal.

 © 2020 IHS Markit®. All rights reserved.


South African producers push more supplies into export market

11 February 2020 | South African Coal Report

South African coal producers are pushing more supplies into the export market to take advantage of stronger prices, which has resulted in a squeeze in domestic supply.

For months, benchmark Richards Bay 6,000 kc NAR prices have stayed well above $75/t FOB, a key threshold that makes the export market lucrative enough to swing supplies from the two main domestic demand centres – Eskom and the inland industrial market.

The longevity of the Richards Bay rally is giving market players the confidence to divert supplies from domestic markets and book longer term export contracts, traders told IHS Markit.

Last week, Richards Bay 5,850 kc NAR min prices averaged $88.97/t FOB, basis 6,000 kc NAR, up 1% from the previous week and the highest weekly average since the one-year high of $92.36/t FOB reached in mid-January.

Traders said the shift in the markets is most evident for 4,800 kc NAR material.

South Africa’s struggling power utility Eskom has been the main buyer of the lower c.v. material for most of last year, but that has changed since the start of 2020.

Eskom, which buys nearly half of South Africa’s 250 mt annual production, has already secured most of its coal for FY2020/2021, providing Eskom-tied suppliers an opportunity to feed more supplies into the export market. Traders said some producers of 4,800 kc NAR were either blending the lower c.v. material with 5,700 kc NAR to produce 5,500 kc NAR coal to sell to Indian sponge iron buyers, or selling the unblended coal to meet their take-or-pay requirements.

“Established coal producers will continue to play Eskom off against other markets and make up their non-Eskom commitments through coal buy-ins from juniors and small scale miners,” said Waheed Sulaiman, managing director of Octagon Minerals, at IHS Markit’s Southern African Coal Conference in Cape Town.

Sulaiman expected Eskom prices to remain attractive this year but would not likely spike more than 10% as in FY2018/19.

Traders were also awaiting producers to publish their inland prices for the year. Glencore is expected to release its inland prices over the next few weeks, providing the benchmark for other producers to price their coal for the year.

Traders said they expected domestic Grade A generic peas to rise to around ZAR1,200/t this year, up 9% from last year.

Inland prices typically rise every year but declined for the first time in recent memory last year after major producers diverted their export supplies and caused an oversupplied market.

 © 2020 IHS Markit®. All rights reserved.


Richards Bay rally to unwind on growing Indian domestic supply

13 December 2019  | McCloskey Coal Report 

The drivers that helped push benchmark Richards Bay prices to their highest level in almost a year are starting to ease, as Indian coal output recovers and lower c.v. South African availability improves.

However, market participants note that the recent rally has significantly overshot on the upside beyond what’s reflective of market fundamentals alone and the short squeeze driven by the supply side could be pulled back and prices are poised for a correction.

Benchmark 5,850 kc NAR min prices have been flat for the past two weeks, hovering above $82.00/t FOB, basis 6,000 kc NAR. In the last full week of November, the Richards Bay FOB marker averaged $86.58/t FOB, same basis.

At the same time, discounts for lower quality South African coals have widened, also suggesting an easing from the end of last month where a bid of $100.00/t FOB for Richards Bay 5,850 kc NAR min loading in December on the globalCOAL screen could not find a willing seller.

The easing in tightness is most apparent in the 4,800 kc NAR space, where discounts have widened to around $17/t to API4 paper in the past few days from $15/t.

A combination of mining issues in India and South Africa and a push by Indian sponge iron makers to secure tonnes of the specific coal they need helped drive Richards Bay prices to close to $100/t FOB.

But the bull run, coupled with better domestic availability, have deterred Indian buyers from booking fresh cargoes since the start of the month.

Expectations are now starting to emerge that the 47% rally since the start of October and the end of last week, is running out of steam and prices will drift lower.

The backwardation seen between December and January jumped to around $18/t at the end of November.

Since December rolled out on 29 November, the backwardation between January and February has wobbled around $6-8/t, enough to push some Indian buyers to renegotiate their committed purchases or at the very least push back deliveries.

“In December, a lot of coal was deferred either to January or sold back to the producer at ’mark-to-market’ losses,” said one trader.

He added that at least four Capes of South African booked for the sponge iron market have been renegotiated. These may have been offset by a pair of Colombian cargoes intended for captive power plants.

Other Indian buyers are eyeing their inventories bought at higher prices with an increasing sense of unease; fearful of the prospect that they may get caught out with expensive stocks as the rally dissipates.

Stock and sale trader inventories of all types and origins of coal at 18 major Indian ports rose to 15.09 mt in early December from 14.79 mt on 28 November, when prices peaked.

Several Indian traders have booked South African 5,500 kc NAR coal for arrival in December and January at the eastern coast ports of Dhamra, Paradip, Vizag, Gangavaram and Krishnapatnam.

And while the coal rolls in, the factors which conspired to push the market up are unwinding.

Market sources say with Richards Bay prices high, coal users in the Gulf region ex-India have secured alternatives, chiefly Russian coals with close to 0.5 mt of Russian coal pricing into the region in the last month.

“The Russian coals have gone to countries such as Pakistan, UAE, Kuwait, Ethiopia and a few other places, where it is displacing (5,850 kc NAR min Richards Bay FOB products), not as a direct substitute but as a blend with (5,700 kc NAR min Richards Bay FOB products) to produce a 5,800 kc NAR typical, 16% max ash kind of product,” the trader source said.

Some in the market estimate so far at least around 1.0-1.5 mt of Richards Bay coal has been either displaced or replaced by Colombian, Russian or Australian cargoes for Indian industrial users outside the sponge iron sector.

For sponge iron producers, the post-monsoon Richards Bay rally has been a double whammy. The fall in domestic supply due to the prolonged rains has made them absorb higher raw material costs, while downstream, prices for steel products have remained under pressure.

“Demand is just not there, and industries in India who consume 50-60% of South African coal, the growth is negative, and steel plants are not doing that great,” an Indian trader said.

The Indian sponge iron makers, who were the drivers of the spike in South African coal demand, and other end-users are now on the sidelines and hoping to take advantage of the backwardated market.

“Many of the buyers are looking at December API4 and the backwardation in January and have not bought anything in December,” the Indian trader added. He said he expected to see an uptick in enquiries for South African 5,500 kc and 4,800 kc NAR min FOB material in January.

However, others worried that the backwardation might persist which could deter buying into the first quarter.

 © 2019 IHS Markit®. All rights reserved.

China silent on import control reset for start of 2020

13 December 2019  | McCloskey Coal Report 

Beijing continues to keep the market guessing on an expected reset of its import controls at the start of 2020.

Many are betting on the curbs being dropped to accommodate a growing backlog at ports from the first of the month.

A pick-up in utility tenders and buying by steels mills, along with suggestions several China-bound cargoes are on the water is fuelling confidence that the restrictions will be rolled back.

However, not all are convinced, and there are plenty prepared to take a wait-and-see approach while the policy vacuum remains.

“We have received no word from ports at this point regarding whether the controls will be lifted," said a source at one Chinese steel mill.

"But no one is worried. Many vessels are on their way to China now."

China had wanted to keep 2019 imports at no more than 281 mt, flat to the previous year, it was long understood.

Various restrictions have been put in place across Chinese ports since the end of the summer in an effort to turn back the tide of growing imports.

These measures were insufficient though, with China overshooting its target by the end of November, hitting 299.3 mt for the first 11 months of the year.

Nonetheless, the curbs have slowed import volumes, with the November tonnage, at 20.8 mt, being the lowest monthly total since February, which was impacted by the Lunar New Year.

This is a trend which reflects the tail end of last year, when import controls were swiftly escalated as Beijing realised its 2018 target was slipping from its grasp.

Amid these measures, imports ground to a crawl last December, slumping to 10.23 mt, which was half of the November figure, and was the lowest monthly volume in nearly eight years. Many are anticipating a repeat this December.

Beijing hit pause on its controls as 2019 got underway, opening the floodgates for a huge backlog, which resulted in January soaring to 33.50 mt, the highest monthly level in five years. Again, many envisage this scenario being repeated in January 2020, if China does indeed drop its curbs.

“The decline in November reflected clearance delays for many cargoes. These cargoes are likely to be pushed into next year for approvals," said a utility source.

Another trading source said a slew of utilities are ramping up their tenders ahead of the Lunar New Year in January, noting that Huaneng, Guodian and Guangdong Energy issued tenders this week.

“The January volume will be disrupted by the week-long Lunar New Year, which could push the February volume even higher,” another trader noted.

China to avoid "blanket ban"

Some utility sources believe Beijing might keep the “quota scheme” rolling into 2020, and could cap overall imports for the year at 300 mt.

Beijing wants to “control imports, but avoid a blanket ban,” sources said, citing discussions between top officials from the National Development and Reform Committee (NDRC) and the powerful National Coal Industry Association at a meeting in early December.

“The NDRC said there will be a standard for how the coal import curbs would be carried out,” a source with direct knowledge of the meeting said.

“China has reached a tipping point,” another top government think-tank researcher said, referencing its efforts to reduce imports after total arrivals breached the target this year.

“The government is highly likely to take a hard stance on imports and pressure end-users to reduce seaborne material in their energy mix,” he said.

But with seaborne thermal and coking coal material increasingly offering better value than domestic products, there is economic pressure to increase imports.

“Power plants have a stronger interest in using low-rank Indonesian supplies," one utility source said.

"Blending low-rank Indonesian supplies helps lower fuel costs," a trader added. "Many have upgraded their boilers so that they can feed the blended grade."

Nonetheless, the cloud of uncertainty may yet linger over China's imports for several months yet.

There are some who believe a clearer message on import policies will not come until the annual parliament meeting, which is set to open on 5 March.

 © 2019 IHS Markit®. All rights reserved.

More competition in the Mediterranean as new coker capacity looks for markets

12 December 2019  | McCloskey Coal Report 

An increase in petroleum coke supplies in the Mediterranean and Northwest Europe will see inter-fuel competition intensify in industrial markets, according to trading sources.

Up to 2.10 mt/y of thermal coal could be displaced, as refinery projects adding up to 1.70 mt/y of extra petroleum coke comes to the market in 2020.

Starting in the Mediterranean, Egyptian Refining Company (ERC) started regularly supplying the local cement market with a sulphur content of 4.5-6.0% in the third quarter and at full capacity it is expected to produce about 0.40 mt/y.

This is in addition to the existing refinery, Midor, which produces a maximum of 0.40 mt/y. It issues a supply tender to the domestic market in April each year.

Egypt has been one of the biggest markets for United States Illinois Basin thermal coal, with over 2 mt exported in 2019 for its domestic cement industry.

However, domestic cement producers are expected to switch to petroleum coke in 2020, probably after the first quarter, as there is enough on the ground in storage to cover this period.

In Turkey, SOCAR’s Star refinery is expected to reach full output in 2020 of nearly 0.70 mt. It is already ramping up production and has started offering cargoes to the local market. It is producing a mid-sulphur (4-5%) quality petcoke, which has been bought by local cement producers and has a slated maximum output of 0.70 mt.

This is the second major coker start-up in Turkey after Tupras started production in 2016.

The start-up of Tupras has already dented petcoke imports into Turkey which have fallen to 2.40 mt in the first ten months of 2019, compared to 4.10 mt in the same period of 2018.

It is partly driven by Tupras increasing supply to the refinery’s nameplate capacity, SOCAR’s expansion and a collapse in cement output. Petcoke from Turkey has also been exported to Egypt where more supply is coming to the market.

In Poland, the Grupas Lotto refinery started up a new coker this quarter and material is already being marketed in Turkey and Egypt. It will produce up to 0.60 mt/y, with sulphur quality ranging between 4.5-6.0%.

Hedged coal expires

The Mediterranean market is also likely to see its supply of US Illinois Basin coal dry up, as hedged coal deals agreed in 2018 have mostly expired and opportunities to lock in prices are limited. Suppliers are unable and unwilling to lock-in price risk when DES ARA prices are below the cost of production.

One of the main suppliers of Illinois Basin coal, Murray Energy is going through financial restructuring under Chapter 11 and asked the bankruptcy court to repudiate its take-or-pay contract with Convent Marine Terminal, as it is simply not profitable to ship Illinois Basin coal at current spot prices.

The expected lack of US Illinois Basin coal on the market could provide limited opportunities for Russian thermal coal, depending on the price. Cement producers in Turkey blend petroleum coke with low sulphur Russian coal, and it is possible that Egyptian buyers will do the same.

 © 2019 IHS Markit®. All rights reserved.


Bangladesh cuts tax on imported thermal coal

11 December 2019  | McCloskey Coal Report 

The Bangladeshi government has cut value-added tax (VAT) on imported thermal coal to 5% from 15% with effect from this week until June 2025.

The move is aimed at encouraging coal-based generation and lowering power tariffs.

In a circular, the country’s National Board of Revenue (NBR) said to qualify for the reduced rate, coal traders should submit a letter to customs declaring the imported coal will be used only for power generation.

Importers of coal used for other purposes are expected to pay the regular VAT rate of 15%, a local source in possession of the notice told IHS Markit.

In addition to VAT, imported fuels attract two further taxes of 5% each. However there is talk that these too may be waived for thermal coal.

The exact impact of the tax cut on power tariffs could not be immediately confirmed by IHS Markit. Fuel costs make up nearly 65% of total electricity production costs, a separate source said.

The government’s move comes at a time when the first 0.66 GW unit of the 1.32 GW coal-fired Payra power station in the south of the country is expected to start commercial operations by early next year.

Indonesian miner Bayan entered into a ten-year supply agreement with the Payra power station earlier this year. In the first three years, Bayan plans to supply 3 mt/y of 5,000 kc GAR material to the plant. In the subsequent seven years, the miner will supply 2 mt/y of 4,400 kc GAR material to the plant.

The power station is designed to consume around 4 mt/y of imports once both units are up and running at maximum capacity.

The tax cut has been welcomed by coal producers in Indonesia – a market that already has a foothold in Bangladesh and offers a freight advantage to end-users in Asia. Several producers interpreted news of the regulation as a strong signal of urgent coal demand in Bangladesh.

“This has been a long time in the making and is definitely a good sign for Indonesian coal producers,” an East Kalimantan miner said.

Another low c.v. Indonesian producer said, “This is particularly good news for Indonesian coal exporters with material that has a c.v. of 5,800 kc GAR or higher. Bangladesh can absorb higher ash coal.”

The government plans to build 20 GW of coal-fired electricity capacity by 2030.

Bangladesh is expected to import just over 4 mt of thermal coal this year and with the addition of new coal plants imports are expected to rise to close to nearly 10 mt by 2022.

The majority of the coal imports are sourced from Indonesia. The country began importing coal in 2013, and since then, volumes have grown exponentially.

 © 2019 IHS Markit®. All rights reserved.


Eskom woes could trigger more South African exports next year

5 December 2019  | McCloskey Coal Report 

Substantial volumes of low c.v. South African coal supplies currently dedicated to power utility Eskom could be diverted to the export market next year, if the government continues to demand the industry lower its domestic prices.

Several Eskom supply contracts, including those with Glencore, South32, and Exxaro, are either expiring next year or being renegotiated.

Industry officials told IHS Markit that any new Eskom supply contract will likely be significantly less attractive for companies given the current political environment. And the likely result will be that producers, who are beholden to shareholders and not the South African government, will turn their backs on Eskom and instead sell more of their supplies overseas.

“We could see a really tense situation where Eskom struggles to find supplies again and Richards Bay is exporting record volumes,” said a senior industry official.

Under growing pressure from parliamentary members, President Cyril Ramaphosa’s administration has stepped up its campaign to get producers to lower their prices for coal sold to heavily indebted Eskom.

Government officials believe the state monopoly, which buys roughly half of South Africa’s 250 mt/y output, is paying way too much for its coal, typically 4,800 kc NAR material or lower.

The industry has so far refused to budge, saying the utility’s troubles are much more complex and varied than just the price of coal.

“We’ve got to lower the price of coal,” Public Enterprises Minister Pravin Gordhan told parliamentary members during a question and answer session this week.

“We’ve talked to the coal suppliers. We need to get them to understand that they need to share the burden in making sacrifices, so that Eskom is in a financially more stable position than it finds itself in this particular time.”

Eskom’s top coal suppliers are Exxaro Resources, Seriti Resources, Glencore, African Exploration Mining, Universal Coal and South32 (which is in the middle of selling its South African thermal coal assets to Seriti).

An analysis of Eskom’s contracts found that nine suppliers earned between 30-49% profit margins, four suppliers pocketed 50-100% margin, and seven suppliers earned at least 100% margins, Gordhan told parliament.

“These are excessive profits and what we want is a fair return for the private sector and a fair price to Eskom, so that all of us can get the best price for electricity at the end of the day,” the minister said.

A parliamentary member said Eskom could be saving ZAR4.5m/day ($0.3m), ZAR10bn ($680m) in six years if it had followed the national energy regulator’s recommend coal price of ZAR350/t ($24).

Some contract prices are substantially higher than this, especially those signed in the last year or two when Eskom found itself scrambling for supplies to keep the lights on.

For example, industry sources said Glencore has entered contracts with Eskom selling 4,500 kc NAR coal for ZAR400/t ($27), 4,800 kc NAR at ZAR500-600/t ($34-41), and 6,000 kc NAR material for ZAR980/t ($67).

These contracts were signed in November 2018 and are due to expire in April and October 2020.

A Glencore spokesman did not answer emailed questions for the story.

“Eskom acknowledges that certain coal contracts are deemed to be excessively priced. Contracts that are deemed to be expensive will be renegotiated,” Gordhan said.

New Eskom contracts could be based on a new indices, which are being pushed by the government to provide better transparency on pricing.

“We are working on indexing the different qualities of coal so that everyone makes a fair return on the one hand but also we don’t exploit the situation as far as the costs incurred by Eskom,” Gordhan said.

If producers do turn their backs on Eskom, they will likely blend their 4,800 kc NAR and lower material with 5,700 kc NAR to produce 5,500 kc NAR coal, which is then sold on mainly to India’s sponge iron industry.

 © 2019 IHS Markit®. All rights reserved.


Richards Bay rally boosts all grades thanks to Indian sponge iron buyers

29 Nov 2019  | McCloskey Coal Report 

Low c.v. Richards Bay thermal coal markets are rallying alongside the higher c.v. benchmark because Indian sponge iron and industrial buyers are not yet incentivised to buy Australian or other cheaper alternatives as they did last year.

Richards Bay benchmark prices have surged more than 70% over the last three months to trade at an 11-month high of $95.50/t FOB, basis 6,000 kc NAR, this week for a December cargo, due to tightness in the market for that specific quality.

This rally has happened in conjunction with the lower c.v. markets, including the much larger Richards Bay 5,500 kc NAR FOB market, with the discount to the API4 staying static, spurred in part by flooding of central Indian mines, which has impacted domestic supply.

Last week, a 50,000 t December cargo of Richards Bay 5,500 kc NAR material traded at $60.10/t FOB, basis 5,500 kc NAR, (equivalent to $65.56/t FOB, basis 6,000 kc NAR), which was a $10/t discount to December API4 paper at the time.

Also, an Indian sponge iron maker was understood to have recently purchased a 100,000 t cargo of Richards Bay 5,500 kc NAR material at an $8-9/t discount to the API4, which at the time was around $73-74/t FOB, basis 6,000 kc NAR. The buyer expects to buy another cargo for January loading at a similar discount.

The API4 paper discount for Richards Bay 5,500 kc NAR material has remained relatively steady at between $8-10/t since the rally began in late August.

When prices rose 23% over a four-month period from April 2018 to a 6-1/2-year high of $109.26/t FOB in July of that year, the API4 discount was maintained at $6-9/t, until the differential to Newcastle FOB 5,500 kc NAR blew out to $19/t in early August.

This stimulated the purchase of Australian coal by Indian buyers, and while this was predominantly by industrials, as opposed to sponge iron manufacturers, this seemed to be the trigger which saw the API4 discount for South African 5,500 kc NAR FOB material blow out from July to a record $25/t by December. Due to this, South African and Australian 5,500 kc NAR FOB prices came back to relative parity.

Today, the differential is less than half the 2018 peak at around $10/t, with Australian FOB 5,500 kc NAR priced last week at $50.13/t FOB and the Richards Bay equivalent at $59.98/t FOB.

Loyal buyers

One of the major reasons for the surge in South African prices has been a significant increase in demand from the Indian sponge iron industry due to the harsher than normal monsoon, which has seen domestic production take a hit. How long this demand will continue will depend on how long it will take for domestic production to get back on track.

The reason the South African/Australian differential will need to increase notably to have an impact on the API4 discount is due to the fact that the Newcastle material has a lower fixed carbon (FC) and higher volatile matter (vols) that both significantly reduce productivity in its sponge iron application.

South African 5,500 kc NAR coal typically has 52-53% fixed carbon (FC), while its Australian counterpart from Newcastle has around 47-48% FC. Higher c.v. coals generally have higher FC, with Richards Bay 6,000 kc NAR material at around 58%, but the benefits are usually outweighed by the higher price for this product with the majority of Indian sponge iron makers.

South African coal is also preferred for its lower vols at 20-23%. Generally, the sponge iron producers look to buy material with vols of 22-24%, which is why some of the larger producers are also prepared to purchase a 6,000 kc NAR Richards Bay, but can take coal up to 26-27% vols. This allows for better heat management and productivity. Most Newcastle 5,500 kc NAR product has a vol range of 27-35%.

Last year, sponge iron buyers that test trialed Australian 5,500 kc NAR material found, due to its combination of unfavorable specifications, they needed to buy 20% more coal to get the same sponge iron output as the equivalent Richards Bay material. Any Australian purchased would be used in a blend.

In addition, Australian material also has swelling properties, which make it more difficult to handle in the DRI process, further deterring buyers.

Another factor maintaining the Indian demand for South African coal at these prices is that the sponge iron industry is still turning a profit with prices rising slightly to around INR17,000/t ($238), up from an average of INR16,500 ($231) in August-October.

However, there are some warning signs: the manufacturers are reducing the production of finished products (which requires more coal) and are concentrating production on unfinished products to maintain profitability.

India’s sponge iron buyers, which drive the market for South Africa’s 5,500 kc NAR material, typically buy on a spot basis and from stock and sale as they want to avoid building too much inventory.

The industry’s coal demand is estimated at around 36-37 mt this year. Large sponge iron makers like Aarati Steel, Tata Sponge, Visa Steel, JSPL and 3-4 other manufacturers use almost 100% imported coal for producing sponge iron. Smaller ones use imported coal depending on price economics.

Imports were expected to be 26-30 mt of that total, representing more than one-third of South Africa’s total exports of around 80 mt/y. However, this is likely to increase due to the mine floodings in central India caused by the wetter than usual monsoon.

There have been some high-profile consequences of the higher than normal precipitation. The third largest Indian opencast mining operation – the 35 mt/y capacity Dipak mine flooded, reducing output from 80,000 t/day to 10,000 t/d.

The mine’s production is mainly consumed by power stations, due it to being a quality below what sponge iron producers would take. However, it is thought that Coal India has diverted coals from higher quality mines to state-owned power stations in the region to fill the gap, robbing sponge iron producers of their contracted tonnages.

This has seen the smaller sponge iron producers look to import tonnes to fill the gap. Consequently, Indian port stocks of 5,500 kc NAR quality material have fallen drastically, stimulating current import demand. And with waiting times at Richards Bay minimal compare to the queues at Newcastle, there is another incentive to buy South African over Australian.

However, the Indian mines are now recovering from the deluge. The Dipak mine has now dewatered and is now operating at 65,000 t/d. Coal India, pressurised by the government, is trying to ramp production back up so that it can get as near as possible to its FY2020 target and power station stocks are getting back to pre-monsoon levels.

The result is that there is some backwardation in the API4 market with February 2020 paper $6 below December. In addition, while Indian demand has been a significant reason for the surge in Richards Bay prices, there is also a lack of available supply with most Q4 spot tonnes booked up in August/September, while there seems to be normal spot supply in Q1 2020.

Exports take centre stage

South African traders say more South African producers are blending their Richards Bay 4,800 kc NAR with higher c.v. material in order to cash in on the rising prices Indian sponge iron buyers are paying for 5,500 kc NAR material.

Due to this, surplus supplies are being diverted away from South Africa’s two domestic markets (Eskom and the inland market), where prices have remained steady for months despite the export rally.

In the domestic market, Grade A peas, equivalent to 6,300-6,500 kc NAR material, were heard being offered at around ZAR1,100/t ($74.54) free on truck/free on trail (FOT/FOR), unchanged month-on-month on a rand basis.

Grade B peas, equivalent to 6,000-6,300 kc NAR, continued to be offered at around ZAR1,000/t ($67.75).

This compares to the $95.50/t FOB trade out of Richards Bay this week, that translates to around $76.50/t FOT/FOR on a netback basis, when taking into account the $19.00/t costs for rail, port handling and taxes.

 

South African coal markets 

Coal Types

Units

Nov 2019 avg

Oct 2019 avg

Nov netback to mine gate

Oct netback to mine gate

Richards Bay 6,000 kc NAR

$/t

75.87

67.60

56.87

48.60

South African 5,700 kc NAR

$/t

67.84

63.07

48.84

44.07

South African 5,500 kc NAR

$/t

56.39

52.03

37.39

33.03

South African 4,800 kc NAR

$/t

44.74

42.04

25.74

23.04

Eskom 4,800 kc NAR

ZAR/t

500.00

500.00

500.00

500.00

 

$/t

33.88

33.88

33.88

33.88

Domestic Grade A branded peas

ZAR/t

1200.00

1200.00

1200.00

1200.00

 

$/t

81.31

81.31

81.31

81.31

Domestic Grade A generic peas

ZAR/t

1100.00

1100.00

1100.00

1100.00

 

$/t

74.54

74.54

74.54

74.54

Domestic Grade B peas

ZAR/t

1000.00

1000.00

1000.00

1000.00

 

$/t

67.75

67.75

67.75

67.75

Source: IHS Markit© 2019 IHS Markit

 © 2019 IHS Markit®. All rights reserved.


Southeast Asia could be next target for US thermal exports

18 Oct 2019  | McCloskey Coal Report 

Southeast Asia could be the next hotspot for United States (US) thermal coal exports, helping to replace declining shipments to Europe.

Asia, specifically Southeast Asia, was a hot topic at IHS Markit's North American Export Coal & Gas Summit in San Francisco. Attendees spotlighted Southeast Asia as a potential lifeline for higher-sulphur, higher-heat coal.

Some said the US could get more than just a toehold in the growing region, which seems to be building its coal-fired power capacity at a faster rate than other countries getting out.

Xcoal Energy & Resources CEO Ernie Thrasher said the main areas for US export growth are the Middle East, Asia and Southeast Asia.

“Once you get outside North America, I haven’t found a fuel that dispatches cheaper than coal,” he said at the conference.

While nobody is saying the last tonne of US coal has sailed to Northwest Europe, there’s little doubt that relying on the region to be the trendsetter for exports is, likely, coming to an end. However, tapping into the growing markets in Asia isn’t going to be as easy as picking up the phone and negotiating prices.

Nick Cron, Xcoal’s head of portfolio optimization and marketing, said US exporters should now be game planning for the possibility Northwest Europe completely phases out of coal. While one door may be closing for the US – albeit a big one – others like North Africa and Eastern Europe are opening to, possibly, “absorb the loss from Western Europe.”

But the plans should extend further than just across the Atlantic.

“Southeast Asia needs to be a part of that,” said Cron.

Countries like Malaysia, Thailand and Vietnam may not mean much when it comes to the history of US exports, but they could be a big part of the future. Vietnam, for example, is going to see its coal use jump by 60 mt/y by 2030, and ceding that and other markets to other countries would seem to be shortsighted.

So far this year, Vietnam's thermal coal imports in the first nine months are up 113% year-on-year to 33.25 mt.

Although logistics could make it hard for the US to match prices, other countries would find it hard to match the heat value of US bituminous coals. Cron suggests the new markets could start by blending US coal with what they are already using to get them used to the heat value.

“They may need to start with a blend instead of going from 0 to 100 all at once.”

In the US’s favor, as Jim McCaffrey, CONSOL Energy's senior vice president of coal marketing pointed out, the supply lines are already in place. If a buyer comes knocking on the door for coal, the one sure thing is it can be delivered.

“We have a mature logistics system that’s already in place,” he said. “We don’t have to rely on a pipeline being built or a wire going up. It’s a shame people don’t see that.”

He also pointed out that while the international thermal markets probably don't “absolutely need” US coal, the stability of those logistics and the various qualities of coal that can be found here make it a good hedge against relying on too little sourcing.

Not all the “maybes” when it comes to exporting US coal work out. A year or so ago, the talk was Turkey was going to be a hot destination for high-sulphur US coal and it never panned out. In the meantime, other countries like Morocco and Egypt have become steady customers and did so without a lot of fanfare.

It wasn’t that long ago that people were talking about India becoming the new China for coal exports. The question now could be how long is it before a country like Vietnam becomes the new India?

 © 2019 IHS Markit®. All rights reserved.


China import controls escalation unlikely as harsh winter looms

18 Oct 2019  | McCloskey Coal Report 

China is unlikely to escalate its import controls now as authorities fear expectations of a harsh winter and the need for economic growth could spark a price rally which would unbalance the market, sources say.

China has been striving to keep 2019 imports flat on the year at 281 mt – a move believed to be an effort to protect domestic miners.

Various imports restrictions have been introduced in the last few months – but have failed to quell the flow, and have, in fact, led to near record levels of arrivals as buyers raced to bring in tonnage in the belief controls would become more severe later.

The latest trade data show China's 281 mt ceiling will almost certainly be surpassed by the end of this month.

However, with the limit near breached, China is showing no signs of further efforts to slow imports, with high levels of cargo clearances in recent days, according to market participants.

“We are seeing lots of cargoes get clearance from non-local customs authorities or from ports that have never handled coal before," one Chinese end-user said.

"It would be difficult for customs to manage the total under the current system."

China's total coal imports for 2019 are now being tipped to finish up at around 300-340 mt, by various analysts polled by IHS Markit.

“Beijing is unlikely to keep imports in check. Otherwise, the policy makers may risk stoking a price rally in winter,” an industrial participant said.

Policymakers are also keeping an eye on weather forecasts with China on course for average temperature that are 2-4℃ below the historical average in northern and coastal cities in January, according to AccuWeather, a weather forecast website, and this will push up coal consumption for heating.

The state-owned utilities have already been given the green light to bring in additional imports for winter stocking purposes.

“Each of the (state-owned) power groups has been given allowance,” a utility source said, while another utility source echoed that there was no disruption to their bookings at this time.

A third state-owned utility source was told by customs that there might be flexibility for quotas for power plants, but noted they were also advised that customs and state-controlled companies must tame imports as part of their “political task".

Meanwhile, another indicator of China's likely easing of its stance on import controls is that it has dropped a blanket curb on industrial production this winter.

Exemption is being given to producers such as steel mills and cement plants that can meet strict emissions standards.

Domestic coal prices have also appeared to reflect a thawing of the imports position, with the benchmark Bohai-rim Steam-coal Price Index (BSPI) dropping RMB1 on the week, to RMB577/t FOB, basis 5,500 kc NAR, from RMB578/t a week earlier.

The power tariff reform announced in late September might also stimulate imports, as generators will need to defend margins.

China is scrapping its benchmark pricing for coal-fired thermal power – established in 2004 – and replacing it with a base price and floating mechanism from 1 January 2020, China's state cabinet announced.

Generators will not be able to increase power prices for industrial and commercial users in 2020, under the scheme, officials said.

As such, power plants with the ability to turn to coal imports are likely to do so to keep their costs in check.

There is also an expectation among some that these generators may lobby the government to allow more imports next year, following two years of stringent controls on importing.

Coastal power plants in Jiangsu province were earlier this year used as a pilot ground for the reform, and were seen to increase their imports in response.

However, some market participants believe Beijing may reduce domestic contract benchmarks instead of opening up the seaborne market.

Imports surge

While the expectation of stricter controls lingered, China's total coal imports in September jumped 20% on the year to 30.28 mt from 25.14 mt, and beating market expectations.

“The robust imports included cargoes that arrived in July but were not able to get clearance until September,” a trader said.

The volume also reflected rising purchasing from utilities that were scooping up tonnage for winter, according to utility sources.

Imports were up 10% on the year in January-September to 251 mt. At this pace, China will surpass last year's imports level of 281 mt by the end of October.

Steel mills get extra

Elsewhere, two steel mills told IHS Markit that they were awarded extra import quota from their local customs authorities.

“I got clearance quota for two cargoes,” a steel mill source said, although they added that it had not been easy to attain.

“Local customs authorities were being cautious with handling clearance throughout the year. But toward the end of this year, they have managed to save some quota for end users,” another steel mill said.

Previously, it was rare for steel mills to get permission from their local customs offices.

No repeat

As it stands, it appears there will be no repeat of last year – when China banned coal imports through the final weeks of the year in a bid to keep volumes within target.

That ban came to light in early October last year, when policymakers called an urgent meeting with power companies.

In contrast, there appears to be reticence from the state planner and the customs authorities this year towards such a drastic measure.

While ports in the southern provinces of Guangdong and Fujian exceeded their annual limits this week, there has yet to be signs of a step-up in restrictions at either.

However, sources have warned that while there may now be an acceptance from authorities that the 281 mt target will not be achieved, it does not mean that China will sit back and allow a large inflow of seaborne coal.

They suggest cargoes will still be getting evaluated for permission on a case-by-case basis.

 © 2019 IHS Markit®. All rights reserved.


Indian industry offers mixed view on govt’s National Coal Index plan

18 Oct 2019  | McCloskey Coal Report 

Indian companies have mixed views on a proposed National Coal Index that the government hopes will attract larger participation in the forthcoming auction of coal blocks for commercial mining.

While those keen to take up commercial blocks believe such an index could offer global price parity, others in the industry fear it could be a precursor to linking Coal India’s prices to such a mechanism, which would make coal linkages more expensive.

Many feel the proposed index will be subject to global price volatility, making fuel cost pass-through for generators, who rely on fixed price through power purchase agreements (PPAs) more difficult to manage.

Advanced discussions are underway to formulate a National Coal Index, even as India’s Ministry of Coal prepares to offer as many as 11 coal blocks for a combined output of as much as 50 mt/y for commercial mining in December, sources said.

Following the August announcement of Foreign Direct Investment (FDI) in the coal sector, it was expected that foreign entities too would be allowed to participate, though sources say participation would be limited to Indian companies.

“Only Indian companies will be allowed to participate in the auctions of coal blocks to be offered for commercial mining,” the source added.

A draft discussion document seen by IHS Markit shows the government is considering two models for the index. The first one is to link coal prices to international indices, while the second model suggests that an average of monthly e-auction prices from Coal India be considered.

In the first model, coking coal will also contribute to the index, and include transactions completed via notified price, auctions and imports, which will be weighted.

The thermal component will comprise of three different types of coal – high, medium and low-grade coal. For the imported coal component in the model, the committee has recommended the use of an international index for coking and thermal coal.

A section of potential bidders looking to participate in the auction seems to favor the first model, which despite its complex structure, offers better certainty on returns on investments.

One industry source said since commercial mining would require hefty investments, the potential return on such investments is best captured by linking the index to global prices.

“It makes no sense to participate in auctions if prices are not linked to international prices,” an official of a company aiming to participate in December auctions told IHS Markit.

However, many in the industry feel it would escalate domestic prices.

“The proposed models don’t work as the price of domestic coal will increase, if we use the foreign component. Domestically produced coal is of lower CV and linking it to foreign index doesn’t make sense,” a mining source said.

The launch of the index may take more than a year due to the diverse opinion coming from stakeholders.

 © 2019 IHS Markit®. All rights reserved.


Met coal miner Bounty agrees to A$90m rescue package from QCoal 

7 Oct 2019  | Inside Coal

Queensland miner Bounty Mining, has been thrown a lifeline by another miner and 6.5% stakeholder, QCoal, with a A$90m ($60.75m) recapitalization deal; beating out competitor deals that were anticipated to be too dilutive for current stakeholders.

ASX-listed Bounty, which has been suspended from trading since it began formally talking to QCoal last week, announced today it had entered a facility agreement for the desperately needed refinancing.

The largest stakeholder, Amaroo Blackdown Investments (17.4%), associated with US trader XCoal, has lost out after its deal was strongly rejected by shareholders last week in favour of QCoal’s option, reported on Friday. Privately-held QCoal produces coking coal from a number of mines in the Northern Bowen Basin including recently commissioned Byerwen mine, which exports through the Abbot Point Coal terminal.

Bounty produces metallurgical coal from the Cook underground mine in Queensland, bought from Chinese backed Caledon Resources after it went into administration in 2017. Cook has been producing at around 1 mt/y since bord and pillar mining resumed in early 2018 but not at rates sufficient to turn a profit.

Amaroo advanced Bounty A$20m at the end of 2018 to provide the first tranche of working capital that got the mine through 2019 but problems have dogged the operation. Finding experienced operators, along with old equipment and problems getting service support for failing gear were among the issues faced since last year.

The Cook mine is currently converting to a different underground mining technique, called place changing, which is expected to increase production and reduce cash costs, a source said.

Meanwhile, QCoal’s deal provides cash funding of A$60m and a $30m guarantee facility which will be used to pay off debt owed to Amaroo and XCoal, originally due on 30 September.

Other obligations that will need to be serviced include replacing the rehabilitation bond guarantee currently held by Glencore, which owns the lease, as well as transferring the lease to Bounty.

Once the current coal offtake agreement with XCoal expires in January 2021, QCoal will take over the offtake for all of Cook’s output, to December 2025. A contingent royalty liability for Cook’s production also looms and QCoal’s funds also cover that.

Bounty has also agreed for QCoal to appoint up to 49% of the directors. “Bounty is now able to move forward with confidence and focus its energies on realizing the potential of our coal deposits,” said a clearly relieved Bounty chair Rob Stewart in the ASX statement.

For QCoal the investment is believed to hold a number of attractions, the Minyango deposit held by Bounty being key. QCoal has projects immediately to the north and to the east of the Cook deposits and sources said ultimately these could be combined into a bigger project.

Of primary significance is the currently underutilised Cook washplant facility. Sources said technically the plant was capable of processing up to 5 mt of run of mine coal, at least five times what it currently handles.

The Cook infrastructure may also in future give QCoal access to the Gladstone port, which could open up partial blending opportunities with its northern mining assets through Abbot Point.

 © 2019 IHS Markit®. All rights reserved.


Taipower to cut 2.50 mt of term coal tonnage next year

4 Oct 2019  | McCloskey Coal Report 

As Taiwan’s government steps up pressure to reduce coal consumption, its dominant generator Taipower is expected to trim its term contract volumes of high c.v. coal by as much as 2.50 mt next year, with a likely uptick in spot tonnes, market sources say.

It is understood there are six high c.v. (6,200 kc GAR) contracts for 0.50 mt/y expiring this year, with four of them from Australian producers. Of those, only one term contract has been renewed, with Glencore understood to have won the six-year tender for supply of 0.50 mt/y.

Prices were heard at around $64/t FOB basis 6,200 kc GAR for the first year with subsequent years settled on April start Japanese Reference Price.

Pressure has been mounting on Taipower to reduce coal consumption to alleviate air pollution concerns, with the generator already trimming its overall coal imports to around 28- 29 mt this year from 32 mt two years ago.

But with presidential elections scheduled for January 2020, policy measures can smack of political expediency. With Newcastle benchmark 6,000 kc NAR prices down 30% in the last six months, Taipower came into the market in May with a slew of spot tenders, breaking a six-month hiatus.

After exercising its minus 20% option on its 2019 term coal contracts in August, it also cancelled a recent spot tender the same month for high c.v coal, after the government directed the utility to switch to gas-fired generation.

Recent tender outcomes also highlight a degree of caution by Taipower with its latest tender for eight cargoes of 5,900 kc GAR coal only partially awarded, sources said.

“Because of winter time, Taipower typically will reduce coal consumption, so don’t have much coal demand for the last quarter,” said a source in Taiwan.

Spot options

The source added, for next year Taipower hopes to maintain its coal imports at around 28-29 mt, but is keen to retain flexibility on procurement. The generator typically buys around 20%-30% in the spot market with the rest term contracted.

“Taipower wants to maintain the flexibility because if the local government wants to reduce coal consumption then it will not secure that many spot coal cargoes,” the source said.

Australian producer sources say with 2.50 mt not being contracted, suppliers will have to look for alternative markets, a task compounded not only by a weak market but also other buyers like South Korea signaling winter shut downs of coal-fired generation.

“Taipower don’t need as much coal next year, and so they are only renewing (term contract) what they think they need,” said an Australian producer source.

Also, it is understood Taiwan’s government has once again cut back coal utilization allowed at Taichung power plant, which typically used to consume 21 mt/y. That has since been reduced to 16 mt/y since 2018 and is now slated for further reduction to 12.6 mt next year.

“That’s a lot tonnes they have cut, and it’s reflective of what they are not purchasing in term contracts,” said the Australian source.

Taiwan’s coal consumption was 67.1 mt last year, and if Taipower doesn’t offset the lower term volumes via spot tonnes, it could reduce consumption by around 4.0% next year.

Winter cuts

As reported last week, Taipower, suspended five units, with 2.7 GW of combined capacity cut over winter months to reduce pollution.

Three of those units are at the country’s largest coal-fired plant, the 5.5 GW Taichung Power Plant to bring its coal consumption to under the 16 mt limit set by the local authorities for this year.

Two of the four units at Taiwan’s third largest coal-fired plant, the 2.1 GW Hsinta plant in Kaohsiung, are also temporarily closed now - with one of those the 550 MW unit one and the other the 500 MW unit four.

Coal consumption at the other two units at Hsinta is also being cut, with unit two’s utilisation reduced to 76% and unit three to 78% Taipower added. Utilisation reductions have also been brought into effect at the 1.6 GW Linkou power plant, with the 800 MW unit two now capped at 46%.

The closures mean 14% of Taiwan’s coal-fired generating capacity has been taken offline. Taipower has not detailed the exact timeframe for the possible closures only indicating it’ll last through winter.

On an assumption the closures will be for around three months, around 2 mt of coal burn could be impacted by the capacity closures alone, not factoring the utilisation reductions at the other units.

 © 2019 IHS Markit®. All rights reserved.


Chinese met coal buyers find import prices too good to refuse 

4 Oct 2019  | McCloskey Coal Report 

Despite the risk of greater import controls, Chinese metallurgical coal buyers are finding import prices too good to refuse due to the huge discounts being offered in comparison to domestic supplies.

Spot deals have been elevated in the last three months – with 93 trades seen in July-September, compared with 38 in April-June.

In September alone, Chinese buyers concluded at least 25 spot deals of prime hard coking coal on both FOB and CFR terms, but activity has tapered off in the last week of the month ahead of China’s Golden Week holiday, when trading typically comes to a halt.

Australian prime hard coking coal prices have fallen to a discount of around RMB150/t ($21.07/t) against China’s Shanxi hard coking coal.

That margin has simply been too tempting for steel plants, despite the risk of lengthy clearances and the prospect of further import curbs at ports.

The IHS Markit assessment for low-volatile coal (MCC4) was $160.50/t CFR China on Wednesday. Shanxi Liulin hard coking coal was reported at RMB1,500/t ($210.67/t) ex-washery, roughly equivalent to Shanxi PLV at around $182.09/t CFR (exclusive of 13% tax and port charges).

“Prices are too cheap for us to ignore, and we are happy to buy seaborne cargoes,” a steel mill source said, adding that the margins were enough to offset at least two months of demurrage of $12-13/t.

Some steel producers were seen placing their orders before fixing a discharging port or designated customs for clearance.

Optimism from Chinese buyers also explains the record high import volume in August, when China’s intake of coking coal was 9.07 mt, breaching the 9 mt mark for the first time.

August tonnage was also way above expectations by market participants, who said lower profit margins for steel would hurt met coal consumption.

Meanwhile, Chinese coal miners claim to be the victims of robust imports, accusing trading companies of dumping Australian cargoes and sinking the market.

“We have had to cut spot prices twice since August to boost sales,” said a manager from Shandong Energy.

“Our product is not competitive, especially when some market players are offering lower and lower prices to get rid of their seaborne cargoes as soon as they can.”

Another miner said domestic coal companies may face deeper cuts in winter on top of mining capacity affected by environmental and safety checks due to volatility in international prices.

“The (domestic) market is in trouble,” said a third coking coal trader. “For years, domestic prices remained stable and were guided by benchmark Shanxi Coking Coal prices. It is unprecedented to watch the turmoil in international markets spread to domestic markets and drag down prices.”

So far, Chinese coal producers have been insulated from steep losses because most of their sales are fixed on term contract prices.

Domestic prices are likely to get some support in the fourth quarter by potential curbs on production.

The forward curve in the international markets is currently in contango with FOB Australia prices for November and December above the current spot price and bids for December loading cargoes some $5-6/t higher than November bids for similar brands.

Moving forward

A prolonged trade war and indications of a slowdown in China’s economy may erode margins for the steel industry next year.

Some steel mills plan to cut back term contract volumes with foreign suppliers as they bet on the market slump rolling into next year, they said.

“It doesn’t make sense for us to take long-term contacts when seaborne prices are floating above $200/t CFR China levels like early this year, and we can buy cargoes in the spot market anytime to take advantage of better prices,” a Chinese steel mill source said.

Currently, most major Chinese steel mills continue to fix term contracts for premium low-vol coking coal like Saraji or Peak Downs brands to secure supply. But some buyers are looking at transferring more volume into the spot market, with the advantage of the current price differential and flexible loading dates.

 © 2019 IHS Markit®. All rights reserved.


Glencore-Tohuku once again stalemated over Oct start JRP

4 Oct 2019  | McCloskey Coal Report 

Swiss-based commodities house Glencore and lead Japanese negotiator Tohoku Electric are understood to again be at odds over their price views for the October start annual thermal coal contracts, with no expectations of a swift settlement for the Japanese Reference Price (JRP).

Glencore is understood to be seeking a mid-$70s annual reference price, while Tohoku is unwilling to go beyond $67/t FOB.

“They are still well over $10 apart,” said a Japanese source noting the gyrations in the Newcastle index made it harder for an early settlement.

While smaller parcels of Newcastle 6,000 kc NAR coal have been bid up recently, with two 25,000 t December clips trading earlier this week at $70/t and $69/t FOB basis 6,000 kc NAR, full cargoes have transacted at considerable discounts with a 75,000 t November trading at $62.50/t FOB, same basis.

Sources say transacted valued of the larger quantity was more representative of the market.

“The spot market definitely favours Tohoku,” said a second trader.

Sources point out, given Tohoku’s volumes for October start contracts from Glencore are around 0.50 mt, it might be in Glencore’s interest to get an early settlement.

“Tohoku is not in a big rush to settle,” said the first source.

From the producers’ side, one source said with supply relatively stable, price expectations were largely flat.

“I see (Newcastle prices) holding. I hope the falling Australian dollar doesn’t make people lower their price and smart people should lock in $66-67/t for higher volumes,” said a producer source.

Others concur noting if producers other than Glencore end up striking deals for higher volumes, it could potentially dilute the miner’s negotiating position.

“I am not sure how much coal Tohoku is after, they have others they can tap,” said a second producer source.

What also potentially complicates a timely settlement is the fact that Japanese utilities, particularly Tohoku, have increasingly become wary of being considered benchmark setters and instead have been keen to hammer out individual deals.

With just around 25-30% of prices for Japan’s annual thermal volumes actually set on a benchmark fixed price basis, the pricing systems has been under pressure.

And other utilities have done their own deals.

Sources point to Hokuriku Electric’s recent spot and term tender heard to be for a total of around 2 mt, which was awarded at around $68/t FOB, with Glencore winning the bulk of the volumes.

With Hokuriku’s annual requirements largely complete, the utility is unlikely to be proactive in the JRP talks.

However, not all end-users are indifferent to a JRP settlement, with Japanese general industry (JGI) users and other utilities outside of Japan such as Taiwan’s Taipower keen to see a deal done.

Sources in Japan say at least some of the JGI customers, who import a combined total of over 20 mt/y, have held off on spot tenders awaiting the settlement of the October start JRP.

Equally, Taipower is also keenly watching the negotiations as at least one term contract from an Australian supplier for 0.50 mt/y is referenced to the October start price.

For these end-users getting an outcome is key, as provisional pricing would mean a roll-over of last year’s October start price of $109.77/t FOB, basis 6,322 GAR.

That said, some market participants also note the Newcastle price curve suggest a building in of risk for supply shortage. With Russian supplies expected to see seasonal fall, and US exports significantly cut, it could gradually affect physical market.

 © 2019 IHS Markit®. All rights reserved.