Market Dynamics
For much of a decade, new market dynamics have been redefining
historical coal industry norms. From 2004, export FOB
prices began to climb steeply, driven by supply-demand imbalances and
infrastructure cost inflation, until export prices more quadrupled,
relative to the stable pre-2004 baseline, as markets peaked in the
summer of 2008 before coming down again, though not to the "old " levels.
Although the overall global demand for steam coal has weathered the
credit crisis and is expected to continue to climb, especially in Asian
markets, it is anticipated that over the long term thermal coal prices
will trend down, over the short and medium term relatively high prices
are more likely to prevail, especially whilst logistics bottlenecks
persist.
Additionally regulatory and climate change concerns in Europe,
Australia and North America have produced initiatives and
legislation aimed at reducing the environmental impacts of
coal-based power, indicating uncertain prospects for imports into
European markets.
The
number of suitable supply jurisdictions is limited. While new coal
supplies will come online, not all of them will be available to the
seaborne market and many are expected to be outside normal thermal coal
quality specification ranges.
Strategy
Given this market background, what are coal importers doing to insure
both the security of their supply and of their bottom line?
Increasingly, this is becoming an era of niche coal trade, where end
power users design their business chains - from sourcing to blending to
contracting, even to boiler design - around a specific set of
strategies designed to hedge against supply and price surprises.
Use of mine- or at least technically-specific coals is becoming more
common, as generators are turning to coals traditionally considered too
low in CV (see here)
or to post-combustion treating of emissions from coals with
nitrogen, ash or sulphur contents previously considered too high.
Specialized blending regimes are also becoming more important in the
search to use off-spec coals.
Novel, long-term approaches are becoming increasingly prominent as
well. Where in the past coal consumers had put out more limited
tenders as stockpiles needed refreshing, more and more they have been
turning to multi-year, or even decades long, hedging instruments based
on indexes or forward curves.
The global seaborne thermal coal trade is undergoing rapid change and,
in tandem with all energy markets, it looks like just the
beginning. Nevertheless, savvy consumers can take the opportunity
to use the turbulence in the markets to develop new strategies and
financial instruments, ensuring some degree of stability in the
choppy seas ahead.
Energy Edge Partner Martin Bloemendal
has over 25 years experience in energy, coal and logistics markets and
is well-known for developing market concepts which improve
competitive edge. If you have questions concerning coal sourcing,
please feel free to contact him today.
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