Coal demand boost as generators turn away from nuclear

As the implications of Japan’s Fukushima nuclear disaster reverberate throughout the global generation sector, coal markets are bracing themselves for an upswing in prices. Despite mixed direction in the short term as damaged Japanese generators cancel deliveries, the long run seems bullish as decision makers from China to Germany mull the replacement of some planned nuclear facilities with coal.

Japan – normally the world’s biggest coal importer – soon expects coal use to exceed pre-disaster levels as it struggles to meet power demand with many of its nuclear plants offline. The 9700MW Fukushima Dai-ichi nuclear facility is just one of 11 nuclear plants left out of action since the earthquake and tsunami. Total electricity capacity shrank by as much as 40% in the wake of the disaster, and power cuts are expected to continue through the summer peak demand months, with capacity likely to be less than 80% of pre-quake levels for some time to come. A number of nuclear facilities are permanently damaged, and others will remain shut.

Japan initially switched to gas imports to fill the short-term generation gap – pushing up global liquefied natural gas (LNG) prices – with coal purchases actually falling due to damaged port infrastructure and offline plants. Disruption to the Australian thermal coal market from the 11th March disaster could last up to two years say coal traders. The regional benchmark Newcastle spot price sank to about US$120/t immediately after the accident, compared to US$130/t before, according to market news and pricing service Platts.

Both Tokyo Electric Co and Tohoku Electric, which normally consume over 50Mt a year – around half Japan’s total thermal coal imports – have been unable to unload some coal vessels. This year Japanese demand for thermal coal could drop by 12Mt, or nearly 10%, according to some experts, but in the longer term imports are expected to rise by about 5%. Further increases are limited as most coal plants work close to capacity already.

Longer term, Japan announced on 10th May that it is to review its whole nuclear policy “from scratch” in the light of the disaster. It had planned to increase nuclear to 50% of total energy demand, from around 30% today. The government now says that although it will still seek to ensure nuclear energy can be used safely, more emphasis will be put on renewable sources such as wave and wind. Coal’s share will also inevitably rise.

Asian annual contracts reach record price

Despite the short-term disruption to Japanese demand, coal producers and Asia-based utilities recently settled annual contracts for 2011-12 at a record high of US$130/t, up 32.6% from US$98/t in 2010-2011, and exceeding the 2008-09 record of US$125/t. This was partly due to supply disruption in several key coal exporting countries, including Australia, Indonesia, and South Africa, which has reduced the amount of coal available on the world market this year.

In addition, China’s massive presence is increasingly being felt in the market, with imports last year surpassing even those of Japan for the first time. Imports have risen quickly since 2009 when China began restructuring its mining sector, which is leading to temporary mine closures and disruption to domestic production. Volumes jump up and down from month-to-month, depending on the relative level of domestic and international prices. As international prices rose after supply disruption from flooding in Australia early in the year, Chinese buyers withdrew from the market. Then in March as Japanese buyers cancelled cargoes, China’s coal imports jumped to 15.22Mt, the third highest monthly volume on record. The buying supported international prices and initial indications are that thermal coal imports then slowed in April, as buyers switched back to relatively lower-priced domestic coal.

China’s domestic steam coal prices, however, rose steadily over April to a four-month high of about CNY820 (US$126)/t, and with international prices also high, many state-owned and private power plants across the country have been forced to cut power production as a way of reducing losses. China normally suffers from power shortages during the summer and winter months, but rationing has come two months earlier than normal this year. Central government is warning of one of its worst summer power shortages, and local governments have already begun restricting power supply to energy-intensive industries.

Analysts say the power crisis that China faces will only be solved when the government changes the system of fixed power tariffs. Government price control worked relatively well when domestic demand could be met by domestic coal supply at a reasonable price, but now imports make up the difference China has become linked to the global coal market. As international prices climb – partly due to Chinese demand – generators are trapped between a capped price market for power and rising coal prices.

Although the government has raised power tariffs recently, it has not been enough to offset the increase in coal prices, and with China focusing on inflation there is little immediate prospect of the government hiking prices further.