Thermal coal: in hot water

A recent flurry of weather-related disruptions, coupled with infrastructure issues have continued to push thermal coal prices up. Here we take a look at the situation and how it may develop over the next few months.

While international thermal coal prices have recently fallen back from the US$140/t seen in early January to a more reasonable, but still painful US$122/t, the current outlook remains uncertain in the near term.

There are some signs that the situation in Australia could lead to a greater-than-forecast dip in the country’s coal output. While estimates suggest that the flooding will cut Queensland coal production by 15Mt, of which only 3-5Mt is expected to be in the form of thermal coal, BHP Billiton has warned that its activities could take another six months before returning to pre-flood levels. Xstrata has reported that its 2010 coal output fell by 6%, due to severe weather impacting on production in the first quarter and in December. The company has indicated that thermal coal output was down 9% for the year at 65.6Mt. As of February 1, New Hope Corp, which typically produces 6Mta of thermal coal, was forced to declare force majeure on some of its export contracts and said that it was seeking approval to temporarily deliver coal by truck at a rate of 50,000t per week, until the completion of repairs to the Western rail system, which might remain closed until mid-April.

The situation at Queensland has put more pressure on the port of Newcastle, which saw its thermal coal exports shoot up by almost 30% in the week ended January 30, from the 1.8Mt seen in the previous week.

Some don’t like it wet

Unfortunately for Indonesian coal miners, the wet weather that frustrated efforts to meet production targets in 2010 and forced some to declare force majeure, is expected to continue until June. The situation is particularly galling, given that some companies are starting to receive inquiries for shipments in 2Q11, but don’t have extra cargoes to offer and are receiving bids from Chinese would-be-buyers at least US$10/t lower than the market rate. Heavy rains triggered a 10% reduction in export volumes in 2010.