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South African coal prices set to soften once again

January 22: South African coal prices, which had started firming up sharply from the second week of December, may start softening after January and are likely to touch a level of less than $82 per ton in March, on the back of multiple reasons, feel industry sources in India.

"South African coal prices started firming up after reports of disturbances in supplies from Colombia due to restrictions on despatches by Drummond. This led to increased demand from European companies for South African coal," they said.

However,  after some initial hiccups, it appears that US coal is finding entry into Europe and this might lead to softness in South African coal prices, they added.

"It is not only the availability of US coal at competitive prices, but a recent trend among Indian cement companies to reduce their dependence on South African coal that will also determine the future price trends," said an official from a cement company.

According to the official, around 20 million tons of coal might be shipped from Drummond's mines to Europe once its facilities for loading of coal directly into ships through closed conveyors are ready.

According to a Bloomberg report, Colombia, the second-biggest coal supplier to Europe, was tightening regulations for exporters of the fuel after a sinking Drummond barge dumped coal in the Caribbean Sea 11 months ago. Colombia accounted for 24% of Europe's imports in 2011, according to the latest data from coal association Euracoal.

The South African standard coal price was quoted at around $86.00 per ton FOB on January 20, but there were discounts of about $1.00 to $1.50 per ton. The price was around $82.00 per ton at the beginning of December 2013.

Indian sources feel, in recent times, it has been found that prices of South African coal generally go up in the second half of any month in an effort to settle the index in the futures market at a higher level.

Once the index is settled at higher levels, the prices start falling and this has been happening for quite some time now, they said.

"One reason for prices not softening in the second half of December was the Drummond effect and, second, stocking by Chinese companies for their New Year holidays. However, with more US coal being available at competitive prices in Europe, the firmness in SA coal may not continue for long," they added.

"Moreover, if prices of South African coal do not soften, there is a probability that Australian miners will further reduce their prices in order to tap Asian and European markets. There is already pressure on Australian steam coal prices due to less demand from China and it is possible that they will start dumping the material into Europe, if SA prices continue to remain firm," a source based in Kolkata said.

"Because of these factors, the current high prices of SA coal should not sustain," an official with a cement company said, adding, "After January 30-31, prices of South African coal will again roll back to $82-83 per ton."

Echoing the sentiment, another source said, the day Colombian coal re-starts going to Europe there will be tremendous pressure on South African prices.

Once the terminal of Drummond is operational near Santa Marta, it will totally change the market dynamics, the source stressed.

"So, overall, despite the regular monthly fluctuations towards the second half of every month, prices of SA coal should start falling and gather momentum after March once the supplies commence from Colombia. However, these are market perceptions," the source added.