Coal news and updates

The increased size of the global coal market combined with the number and diversity of supply sources has caused global coal prices to be increasingly interrelated and to have spill-over impacts on domestic coal pricing in countries producing coal. In the U.S., the direct relationship has increased as a result of the relative weakness of the U.S. dollar, the widespread use of U.S. dollar-based indices to price coal, and a supply of U.S. coal available for export. The relationship between U.S. coal and international coal pricing is likely to increase further with growth in global coal trade driven by increased demand, particularly from Asia, an increased reliance on coal exports to maintain/expand production levels, and the growth in export infrastructure, particularly into Pacific markets.

 

In 2011, world coal production exceeded 7.6 billion tonnes.A Most coal is characterized by use as either thermal (i.e., steam), for use in boilers and kilns, or metallurgical, for use as a feedstock in the production of steel, although some coal can fit either application. Such coals are referred to as cross-over coals. Although most coal is consumed in the country in which it is produced, both types of coal are traded in the international market. In 2011, the International Energy Agency (IEA) estimated world coal trade to be over 1.1 billion tonnes, comprised of 861 million tonnes of steam coal and 276 million tonnes of metallurgical coal.1 The seaborne market makes up about 90% of global trade with about 10% traded over land.

 

To figure out where the coal trade market is going it is helpful to look at where it has been. The seaborne steam coal market has increased fourfold since 1990. While Europe and Japan accounted for the bulk of demand until 2000, since then the growth has primarily been in Asia. On the supply side, Indonesia has become the dominant supplier of steam coal while Australia, South Africa, and Colombia are significant as well. In the last two years, exports from the U.S. increased significantly, due in large part to surpluses caused by the increase in production and usage of shale gas. Figure 1 shows the sources for supply and demand of the seaborne steam coal trade.

Coal sold into the export market is generally sold at the loadport or delivered to a destination port. In addition, coal sold into the global market can be sold on either a fixed price or an indexed basis. A number of coal indices have been developed over the years to allow for both physical and financial trading. As all global seaborne coal trade is U.S. dollar- denominated, all of the indexes are in U.S. dollars. The indexes tend to vary by geographic area with certain indexes dominant in the Atlantic market and other indexes dominant in the Pacific market, although indexes do cross over between markets (e.g., coal in the Pacific market could be sold on an API4B basis). While some coal is actually traded at the indexes, coal is more often traded at a premium or discount to the indexes depending upon market conditions. Forward pricing is common in the coal trade.

 

Parties which sell or purchase coals tied to liquid indexes can convert all or a portion of their positions from floating to fixed through financial instruments offered by banks as well as many producers/traders themselves. As each party can use its own hedging strategies, it is not unusual for there to be a divergence between what a producer/trader is realizing in the sale of the coal and what a buyer/consumer is paying for it.

 

Interrelationship of U.S. Coal Pricing with International Prices

 

While the price of coal was historically stable compared to the major fluctuations observed in oil and natural gas prices, volatility has increased in recent years due to market dynamics. A number of factors have increased the relationship between U.S. and international coal prices; each factor is discussed below.

 

Value of U.S. Dollar

 

With global coal pricing U.S. dollar-denominated and the U.S. representing a small share of total exports, the relative strength of the U.S. dollar has been very relevant to the establishment of global coal price levels. The relationship of most significance has been between the U.S. dollar and the Australian dollar as Australia is the largest exporter of metallurgical coal and until 2011 the largest exporter (in tonnes) overall. Indonesia surpassed Australia in 2005 as the largest exporter (in tonnes) of steam coal.

 

The U.S. dollar has significantly weakened vis-à-vis the Australian dollar over the last decade except for a relatively short period during the global financial crisis in 2008/2009. The significance of this weakening can be seen in a simple example. For an Australian coal producer to realize the same value for its coal in Australian dollars, the price in 2013 would have to be 77% higher than it was in 2003 just to capture the difference in currency. This increase does not take into account general inflation or real changes in commodity prices, such as fuel oil. Obviously, the higher the global price of coal, the more U.S. coal producers can realize for their product.

 

The significance of the exchange rate is best seen through an example. In the 1990s, a number of parties, including Japanese trading companies, agreed to construct a coal terminal near Los Angeles, CA. The terminal, referred to as LAXT, was designed to handle 10 million tons of coal expected to originate in the Rockies coal supply region, i.e., Utah and Colorado. The commitment to build the terminal was made when the U.S. dollar was relatively weak. As shown in Figure 2, the U.S. dollar strengthened significantly after the commitment was made, changing the relative economics of Rockies coal into the global market. Not surprisingly, relatively few tons moved through the terminal and the decision was made to close (and decommission) the terminal about five years after it started operating.  Ironically, with the decreased strength of the U.S. dollar almost since its closing, this terminal would be in great demand if it were operational today.

 

Limited Sources of Metallurgical Coal

 

Metallurgical coal is a subset of the global coal market, currently accounting for about 25% of global coal trade. Two factors distinguish the metallurgical coal trade from the steam coal trade: first, and most significant, the fewer number of sources of metallurgical coal; second, and not unrelated, the higher value of this product.

 

Three countries (Australia, the U.S., and Canada) account for about 85% of metallurgical coal trade; see Figure 3 for details. For more than a decade, Australia has accounted for over 50%, and in recent years over 60%, of the volume. As a result of the limited supply, a disruption in one country can affect not only the market for metallurgical coal but the coal market overall. As discussed above, this is because some coals moving in the steam coal market can cross over into the metallurgical market when metallurgical coal supply is tight. As a result, the steam coal market firms as additional coal is needed to fill the vacuum created by the cross-over coals.

The best example of the relationship of metallurgical coal supply to steam coal pricing occurred in late 2010/early 2011 as a result of heavy rains and extensive flooding in Queensland, Australia, the primary source of metallurgical coals in Australia. The significance of this event can be seen above in the reduced metallurgical coal exports from Australia in 2011. It can also be seen in the increase in the benchmark price of metallurgical coal in the first quarter of 2011, see Figure 4. Due to the ability of some coals to cross over and the huge premium for metallurgical coal, the global price of steam coal also rose in the first quarter of 2011 as did the price of U.S. steam coal.

 

More recently, it was the U.S. coals which affected the global market. In 2011 and 2012, domestic demand for U.S. coals declined for several reasons, the most significant of which were the increased supply of shale gas and the very mild winter of 2011/2012 that created a significant natural gas supply overhang. The excess supply had no place else to go in the short term except the utility market,C and natural gas prices fell to the levels necessary to allow combined cycle-fired natural gas plants to dispatch ahead of coal plants. The net effect was a steep decline in domestic utility demand, thereby creating a supply overhang of coal. In order to manage the excess coal supply, producers, consumers, and traders looked to the export market. The large increase in exports, as shown in Figure 5, combined with distress pricing actually caused the global market price to decline. The historical price table shows that the decline in Appalachian coal prices preceded the decline in the Atlantic market price.

 

Netback Pricing

 

The increase globalization of coal supply has resulted in export coal prices being set as netbacks from key market hubs. In the Atlantic market, the key market hub has historically been northwest Europe, or Amsterdam, Rotterdam, and Antwerp (ARA). Based upon the ARA price and prevailing shipping rates from each loadport to ARA, an FOB (free on board) loadport price can be determined for each coal source by subtracting the freight from the ARA price. Using “estimated” rail and port charges for U.S. coals, FOB mine prices can be compared to the netback price to determine both the relative competitiveness of the U.S. coals and the price they could hope to realize. When the netback price is higher than the market price, the coal is competitive.

 

At prices extant in early Q2 2013, U.S. coals are largely uncompetitive into Europe given the prevailing market prices. In fact, the only coal competitive to Europe at this particular time is Colombian coal which has a netback above the prevailing market price. While the market does continually rebalance, the point is pricing in the global market is based upon netback pricing, which further integrates all of the various supply regions.

 

What Would It Take to Increase Price Interconnectedness?

 

The current limitations on price interconnectedness with U.S. coals fall into two categories: Atlantic market prices and west coast export terminal capacity. As shown above, pricing outside of the U.S. actually only affects eastern U.S. coal prices when U.S. coals can trade near the global value. At current global prices, most U.S. coals are not competitive and new trades will only occur at a discount to market prices. This situation is likely temporary, and U.S. competitiveness will improve with modest firming of the market. Expanding west coast export terminal capacity is required to realize the sizable growth in exports of western coal into the Pacific market, as current western U.S. coal exports are limited to small terminals on the west coast, Canadian terminals, and movements through the Great Lakes or the U.S. Gulf, none of which are very efficient. Although a number of new terminals and terminal expansions have been announced, any significant expansions are being challenged and are likely years away. Until such expansions occur, the interconnectedness of western U.S. coal prices to the global market is likely to be muted.

 

Source: www.pennenergy.com