page title
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Crops
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Livestock
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Energy
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Metals
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Thermal coal
Kate Penney
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Spot prices more than halve in the second half of 2008
Newcastle thermal coal traded at a record spot price of US$201 a tonne in early July as a result of strong demand for electricity and high prices for energy commodities generally. Spot prices subsequently declined to a low of around US$73 a tonne in early December, corresponding to a decline in oil prices, weaker global economic growth prospects and a stronger US dollar. While spot prices have fallen considerably over the past three months, they remain historically high.

Expansions to coal-fired electricity generation capacity, particularly in Asia, infrastructure constraints in key exporting regions and relatively low prices compared with other energy fuels are expected to continue to support thermal coal prices.

The majority of Australia’s thermal coal trade is conducted on a contract basis, the terms of which are set until the end of March 2009. Negotiations between Australian coal suppliers and Japanese power utilities settled thermal coal contract prices for the Japanese financial year 2008 (JFY, April 2008 to March 2009) at around US$125 a tonne in April 2008, an increase of 125 per cent on the previous year. Weaker global demand as a result of the global financial crisis, growth in supply and an assumed depreciation of the Australian dollar indicate contract prices (denominated in US dollars) are likely to fall for JFY 2009.
COAL 1
World trade to continue growing
World thermal coal trade in 2008 is estimated to have increased by 4 per cent to 724 million tonnes because of increased imports by Asian countries, particularly Japan, the Republic of Korea and India. Thermal coal trade is forecast to increase by a further 3 per cent in 2009 to
747 million tonnes.
Japanese, Korean and Indian imports increased in 2008
In the first ten months of 2008, Japanese imports of thermal coal increased by 6 per cent year on year. The strong growth in thermal coal imports reflects increased coal-fired electricity generation as a result of lower nuclear power and hydroelectric power utilisation. Japan’s utilisation of nuclear power has not recovered as previously expected because Japan Atomic Power Company’s Tsuruga unit 2 is out of service, the expected restart at Kansai Electric’s Ohi unit 3 has been delayed, and Chubu Electric’s Hamaoke unit 5 was closed for safety checks.

Japan’s imports of thermal coal are forecast to decline by 4 per cent to 130 million tonnes in 2009. The demand for coal stemming from the addition of new coal-fired electricity generation capacity is expected to be more than offset by increased utilisation of nuclear power and the dampening effect of economic contraction on electricity generation.

In the Republic of Korea, increased thermal coal imports in 2009 are expected to be supported by the addition of new coal-fired electricity generation capacity. Thermal coal imports are estimated to have increased by 16 per cent to 76 million tonnes in 2008 and are forecast to rise by a further 7 per cent to 81 million tonnes in 2009.

India is also expected to provide further support for thermal coal imports in 2009. The Indian Government has asked power generators to import 15 million tonnes of thermal coal before the end of the current financial year (April 2008 to March 2009) to ensure security of supply for existing generators and planned expansions to coal-fired electricity generating capacity. A significant number of India’s thermal power plants have stocks of less than one week’s supply of coal. In 2008, India’s thermal coal imports are estimated to have been 34 million tonnes, and are forecast to increase by 15 per cent to 39 million tonnes in 2009.
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Thermal coal outlook
2007
2008
f
2009
f
% change
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World  
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Total trade
Mt
 696.5
 723.8
 746.9
 3.2
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Imports
Asia
Mt
 378.1
 399.1
 411.9
 3.2
– China
Mt
 41.4
 36.0
 40.0
 11.1
– Chinese Taipei
Mt
 61.3
 64.0
 65.0
 1.6
– India
Mt
 30.7
 34.0
 39.0
 14.7
– Japan
Mt
 128.3
 135.0
 130.0
– 3.7
– Korea
Mt
 65.8
 76.0
 81.4
 7.1
– Malaysia
Mt
 15.8
 16.5
 17.6
 6.7
– other Asia
Mt
 34.9
 37.6
 38.9
 3.5
Europe
Mt
 230.5
 231.6
 233.8
 0.9
– European Union 25
Mt
 182.2
 181.0
 182.0
 0.6
– other Europe
Mt
 48.3
 50.6
 51.8
 2.4
Other
Mt
 87.9
 93.2
 101.2
 8.6
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Exports
Australia
Mt
 112.2
 122.4
 123.4
 0.8
China
Mt
 50.7
 43.0
 38.0
– 11.6
Colombia
Mt
 67.2
 66.5
 69.0
 3.8
Indonesia
Mt
 190.7
 203.0
 217.0
 6.9
Russian Federation
Mt
 85.2
 80.0
 81.0
 1.3
South Africa
Mt
 65.8
 66.0
 67.0
 1.5
United States
Mt
 24.2
 31.0
 29.0
– 6.5
Other
Mt
 100.5
 112.0
 122.5
 9.4
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2006-07
2007-08
2008-09
f
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Australia
Production
Mt
 181.1
 185.1
 193.6
 4.6
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Exports
Mt
 111.6
 115.1
 123.6
 7.4
– value
A$m
6 758
8 365
18 111
 116.5
f ABARE forecast.
European Union imports moderating
European Union imports of thermal coal are estimated to have declined slightly in 2008 to around 181 million tonnes. In the first nine months of 2008, German coal consumption declined by 5 per cent, mainly because of lower demand from power stations. Similarly, Spain’s thermal coal imports are estimated to have declined because of scheduled outages at coal-fired plants for the completion of maintenance and upgrades. Lower imports by Germany and Spain have been partially offset by larger imports in smaller European countries.

Imports of thermal coal by the European Union in 2009 are forecast to increase slightly to 182 million tonnes, supported by the closure of high cost coal mines throughout Europe.
China’s imports down in 2008, but to increase in 2009
In 2008, China’s thermal coal imports are estimated to have declined by 13 per cent to 36 million tonnes. Record thermal coal spot prices and a ban on some coal exports from Viet Nam into China contributed to weaker imports in the first nine months of 2008. However, despite weaker demand, continuing infrastructure bottlenecks, lower global freight rates and the closures of small scale mines are expected to support increased imports in 2009.

China’s railways are the most congested in the world with 25 per cent of global rail traffic running on 6 per cent of the world’s railway tracks. In early 2008, the Chinese Government limited coal exports, in part because of the inadequacy of the rail infrastructure to support both domestic and export demand. Around 60 million tonnes of new rail capacity is estimated to have been added in 2008 and a further addition of around 127 million tonnes is expected in 2009.

Declining international prices for thermal coal and lower freight rates have encouraged increased imports by China from Australia and Indonesia. It is estimated that at the end of October, the cost of importing Australian coal into southern China (including freight and Chinese import taxes) was around US$13.50 a tonne cheaper to users than Chinese domestic coal.
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China’s export licences for 2008 (million tonnes)
licences issued
in March 2008
licences issued
in October 2008
total licences
issued in 2008
exports
March–October
licences issued
in 2007
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China Coal
13.1
6.55
19.65
11.62
31.8
Shenhua
13.1
6.55
19.65
13.24
25.9
Shanxi
3.2
1.6
4.8
3.23
7.8
Minmetals
2.4
1.2
3.6
2.34
4.5
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Total
31.8
15.9
47.7
30.4
70
China’s exports will continue to decline
China’s thermal coal exports are managed by a quota system, where licences are allocated to coal exporting companies on an annual basis. This mechanism allows the government to control the volume of coal exported.

In 2008, the government issued the licences in two tranches. The first tranche for 31.8 million tonnes of thermal coal was issued in March. The second tranche for 15.9 million tonnes was released in late October— a total of 47.7 million tonnes for 2008 as a whole.

Given international coal prices have declined by a greater amount than Chinese domestic prices, it is unlikely all of these licences will be used before they expire at the end of December 2008.
Global supply remains constrained
In 2008 and 2009, world import demand for thermal coal is expected to be met by increased shipments from Australia, Indonesia and, to a lesser extent, Colombia. However, growth in supply remains constrained by infrastructure, weather and labour related issues.

Exports from South Africa are estimated to have increased only marginally to 66 million tonnes in 2008, and are forecast to be 67 million tonnes in 2009 as growth in South African exports continues to be limited by capacity constraints at the Richard’s Bay Coal Terminal.
Colombian exports in 2008 are estimated to have declined by 1 per cent to 67 million tonnes because of heavy rainfall and security and labour issues. Poor weather conditions affected production at all exporting mines, with Drummond forced to declare force majeure in early October. Exports are forecast to increase by 4 per cent to 69 million tonnes in 2009, assuming normal seasonal conditions. Production expansions at Cerrejon and Drummond will also contribute to this increase.

Indonesia’s exports of thermal coal are estimated to have increased to 203 million tonnes in 2008 and are forecast to increase by a further 7 per cent in 2009 to 217 million tonnes. A number of companies are expanding production in response to higher prices observed at the beginning of 2008.

In 2008, US thermal coal exports are estimated to have increased by 28 per cent to 31 million tonnes. The United States is a swing producer of coal, increasing production and exports to fill supply–demand gaps in the Atlantic market. In 2008, US exports of thermal coal increased following disruptions which affected the ability of other major Atlantic market exporters (South Africa and Colombia) to meet demand for thermal coal.

US exports are forecast to remain at around 29 million tonnes in 2009, underpinned by the expectation of limited supply growth in the Atlantic market.
Australian export earnings to increase
After increasing by 3 per cent in 2007-08, Australian thermal coal exports are forecast to increase by 7 per cent in 2008-09 to 124 million tonnes. The completion of projects during 2008 and in early 2009 — including Glendell (4.5 million tonnes a year); the Dawson expansion (3.4 million tonnes a year); the Liddell washplant upgrade (an expansion of 4.2 million tonnes); Rocglen (1.5 million tonnes) and Narrabri (2.5 million tonnes) — are expected to support this increase.

While capacity constraints have limited the Australian coal industry’s ability to respond to growing global demand, recent additions to infrastructure capacity, together with more expansions planned over the next six months, will help alleviate some of these constraints.

Earnings from thermal coal exports in 2008-09 are forecast to increase by 117 per cent to $18.1 billion in line with higher export volumes, high contract prices and an assumed weaker Australian dollar. Variations in planned shipments provide a downside risk to Australia’s export earnings from thermal coal. However, there has been no indication this is likely to occur.