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Nacala
Industry Insight  
16 October 2017

EXCLUSIVE: Steam coal in the South African inland and global markets

The South African coal industry will, for many years to come, be a reliable supplier of cheap inland energy and a source of profit for big and small producers.

The following is a quote from the latest news released by the Copenhagen Consensus Centre, ranked by the University of Pennsylvania as one of the world’s Top 25 Environmental think-tanks.

Xavier Marcel Prévost

AUTHOR: Xavier Marcel Prévost, senior coal analyst at XMP Consulting.

“Scientists have changed their minds about the rate of climate change — saying the Earth is not heating up as rapidly as feared.

"A study in Nature Geoscience says that the computer models used by governments to predict climate change exaggerated the impact of man-made emissions.

"If the world had followed the original predictions, only 70 billion tons of carbon could be emitted after 2015, to save the planet.

"But new predictions suggest we can emit an extra 240 billion tons.”

This is good news for us, depending so much on coal for energy.

One of the new study’s authors, Oxford’s Prof Allen, said: “We haven’t seen the rapid acceleration in warming after 2000 that we see in the models.”

Many of the predictions “were on the hot side”, he added.

With that in mind, we expect that the South African coal industry will, for many years to come, still be a reliable supplier of cheap inland energy and a source of profit for big and small producers.

Observing current coal prices, sizes and qualities available in the inland market, we seek to provide a picture of the status of inland coal supply and a glimpse of future developments.

It is true that the further a mine is from its buyer, the lower the price at the mine gate.

This trend has slightly changed and mines are now pricing coal relative to production costs and not only according to the distance to the market.

Without an inland price index, mines selling to this market have taken their lead from each other to set prices, with the main traders controlling the price setting.

Before 2009, inland market prices increased at approximately 10% per annum using a bi-annual escalation (March and October).

Between 2005 and 2008 coal prices rose by an average of 15%. From 2011 to 2015 coal prices increased by 8% and then again by 5% during 2016.

An average A/B grade Duff price is currently R606/t and the same grade Pea is R788/t, that is, R182.00/t higher than Duff.

As transport still plays a role, with logistics and fuel costs ever-growing, mines closer to users have had a slight advantage when determining delivered price to end-users.

Duff was sold into the local market at a lower price than the bigger size fractions (Peas and unsized coal).

Now we find that large quantities of Duff are also being exported.

Current prices show a healthy growth and as local demand increases, prices will follow suit.

In the global, seaborne market, steam coal prices fluctuated extensively in the last half of 2016, mainly due to China’s influence on the coal market.

Steam spot prices increased from $66/t in 2016 to $80/t in 2017, but are predicted to decrease to $73/t in 2018.

From 2018, low gas prices in the EU will produce an increase in coal-to-gas displacement.

Low gas prices will displace 10 Mtpa of import demand by the end of 2019. South African exports to Europe are decreasing from 31% in 2015 to 21% in 2016 and 12% in 2017.

Exports will be dominated by low-cost mined coal.

Minimum contractual tonnages and sunk costs in rail, barge and terminal will promote exports at very marginal profit levels.

Are there other markets for displaced tons?

We expect that growth elsewhere will provide markets for some volumes.

Exports to the Pacific, eastern Mediterranean and Indian Ocean will grow, while exports to Europe will be replaced by growth in exports to India, Latin America and other small markets.

Price impact is almost neutral.

A slight downward revision on price forecasts is expected, as well as a general tightening of supply and growth in India and Asia.

Price-controlling regulations in China should support prices should they fall.

The overall picture shows substantial growth in prices and tonnages for the inland market, while seaborne coal prices could remain static or decrease.

This will generate an almost parity between inland and export prices, resulting in an accelerated growth to the local market at the expense of dwindling exports.

The message for the South African industry is that, to cope with an expanding demand and higher future prices, the coal production, stagnant since 2013, necessitates the implementation of additional projects and mines as soon as possible.

The dreaded date of the coal cliff (drop in coal production) is only two years away.

Feature image credit: Wikimedia

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