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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
Thermal coal reached a record spot price
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 alternative fossil fuels. Spot prices subsequently declined to around US$150 a tonne in mid-August, coinciding with a decline in the price of other energy commodities. The inability of some major coal exporters to rapidly increase supply has also supported the thermal coal spot price.

Exports from the major producing countries, including Australia, Indonesia and Colombia, are expected to increase during the remainder of 2008 and in 2009 as production capacity increases. However, restricted exports from China will provide support to the spot price. In addition, expected high prices for substitute energy fuels — oil and gas — will continue to support demand for thermal coal because it is a relatively low cost energy source.

World thermal coal trade in 2008 is forecast to increase by 4 per cent to 722 million tonnes because of increased imports by Asian countries, particularly Japan and the Republic of Korea. In 2009, world thermal coal trade is forecast to increase by a further 3 per cent to 745 million tonnes.
Japanese and Korean imports to increase moderately in 2008
In the first seven months of 2008, Japanese thermal coal imports increased by 9 per cent year on year. The strong growth in thermal coal imports reflects increased coal-fired electricity generation as a result of lower utilisation of nuclear and hydroelectric power capacity, and the cost competitiveness of coal compared with oil and gas.

However, the strong growth in imports is expected to slow in the remainder of 2008 because of a recovery in the utilisation of nuclear power capacity as operations resume at a number of nuclear power plants. For example, Hokuriku’s Shika Unit 2 resumed commercial operation in July, having been shutdown in mid-2006 for safety inspections and upgrades. Japan’s utilisation of nuclear power capacity passed 70 per cent in August for the first time since mid-2007.

Japan’s imports of thermal coal are forecast to decline by 3 per cent to 130 million tonnes in 2009. The addition of 600 megawatts of coal-fired electricity generation capacity is expected to support increased consumption. However this is expected to be offset by increased utilisation of nuclear power generation.

In the Republic of Korea, the addition of 5200 megawatts of coal-fired generation capacity between 2007 and 2009 is expected to support increased thermal coal imports in 2008 and 2009. Thermal coal imports are forecast to increase by 9 per cent to 72 million tonnes in 2008 and by a further 8 per cent to 77 million tonnes in 2009.
European imports to decline in 2008
European Union thermal coal imports are forecast to decline by 2 per cent in 2008 to around 179 million tonnes. The use of thermal coal in Germany is forecast to decline slightly as a result of lower coal use in power generation. Three new gas-fired power stations were commissioned in Germany in 2007, which increased gas consumption at the expense of coal. Spain’s thermal coal imports are forecast to fall because of scheduled outages at a number of coal-fired plants for the completion of maintenance and upgrades.

In 2009, imports of thermal coal into the European Union are forecast to increase marginally to 180 million tonnes. Germany’s production of coal is expected to decline in line with mine closure plans, which will support increased imports. Capacity utilisation of coal-fired plants in Spain is expected to increase following outages in 2008. As a result, Spain’s coal imports are also forecast to increase.
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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
 721.6
 744.9
 3.2
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Imports
Asia
Mt
 378.1
 398.1
 410.9
 3.2
– China
Mt
 41.4
 40.0
 43.0
 7.5
– 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
 134.0
 130.0
– 3.0
– Korea
Mt
 65.8
 72.0
 77.4
 7.5
– 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
 230.4
 232.8
 1.0
– EU 25
Mt
 182.2
 178.8
 180.0
 0.7
– other Europe
Mt
 48.3
 51.6
 52.8
 2.3
Other
Mt
 87.9
 93.2
 101.2
 8.6
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Exports
Australia
Mt
 112.2
 119.3
 125.0
 4.8
China
Mt
 50.7
 42.0
 37.0
– 11.9
Colombia
Mt
 67.2
 70.0
 73.0
 4.3
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
 65.0
 67.0
 3.1
United States
Mt
 24.2
 27.0
 26.0
– 3.7
Other
Mt
 100.5
 115.3
 118.9
 3.1
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2006-07
2007-08
2008-09
f
% change
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Australia
Production
Mt
 181.1
 184.6
 192.4
 4.2
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Exports
Mt
 111.6
 114.9
 122.4
 6.5
– value
A$m
6 758
8 336
s
17 797
 113.5
f ABARE forecast. s ABARE estimate.
China’s imports steady
In 2008, China’s thermal coal imports are forecast to be around 40 million tonnes. Rapid growth in electricity demand and infrastructure bottlenecks between the mines in China’s north and the main consuming regions in the south-east supported increased imports during 2006 and 2007. However, increased thermal coal spot prices and a ban on some coal exports from Viet Nam into China contributed to a decline in imports in early 2008.

Power shortages have affected industry in more than half of China’s provinces resulting from difficulties in sourcing coal. The electricity shortages are partly attributable to the closure of small, inefficient and unsafe coal mines and the structure of China’s electricity market, which is characterised by significant government regulation.

China’s coal sector was liberalised in 2007, allowing coal prices to be determined by the market. In contrast, the power sector remains government controlled with prices capped. As a result, electricity prices have not been allowed to increase (to prevent inflation) despite substantial increases in coal prices over the past two years. Power stations have therefore been unable to pass on higher input costs to consumers in the form of higher electricity prices. Consequently, a large proportion of China’s power producers are making losses.

To address this issue, in June 2008, the Chinese Government increased the price of electricity for industrial users by 5 per cent to RMB0.555 a kilowatt hour (around US$0.08 a kilowatt hour). The Chinese Government increased electricity prices slightly again in August. In addition, the government capped the domestic price of coal at the prevailing price on June 19 until the end of the year (approximately US$140 a tonne, excluding the 10 per cent export tax).
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 how much coal is exported in a year.

In 2008, the government is issuing the licences in two blocks. The first tranche of export licences was issued for 31.8 million tonnes of thermal coal. The second tranche is expected to be issued in September. However, there is considerable uncertainty about the volume of exports that will be allowed. In early August, the government informed the four exporters of thermal coal that the second tranche of export licences will be lower than the original expectation of 21.2 million tonnes.

In addition, the Chinese Government imposed a temporary tax of 10 per cent on thermal coal exports from 20 August 2008, which will increase the price of coal exports destined for other Asian markets including Japan and the Republic of Korea.
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China’s export licences for 2008 (million tonnes)
 
licences
licences available
issued in
exports
at the end of
licences issued
Mar-08
March–June
Jun-08
in 2007
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China Coal
13.1
6.77
6.33
31.8
Shenhua
13.1
7.62
5.48
25.9
Shanxi
3.2
2.05
1.15
7.8
Minmetals
2.4
1.77
0.63
4.5
Total
31.8
18.31
13.5
70
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Infrastructure and weather affect a number of major suppliers
In 2008 and 2009, the strong world import demand for thermal coal is expected to be met by increased shipments from Indonesia, Colombia and Australia. Exports from South Africa are forecast to be 65 million tonnes in 2008 and 67 million tonnes in 2009 because of capacity constraints at the Richards Bay Coal Terminal.

Indonesia’s exports of thermal coal are forecast to increase by 6 per cent to 203 million tonnes in 2008 and by a further 7 per cent in 2009 to 217 million tonnes. However, this growth is slower than that witnessed in 2006 and 2007 because of supply uncertainty from small-scale producers as a result of rising costs and reduced input availability. Despite this, a number of companies are expanding production in response to high export prices by developing previously uneconomic deposits, which will support increased exports.

In 2008, Colombia’s thermal coal exports are forecast to increase by 4 per cent to 70 million tonnes. Expansions at large mines including Cerrejon and Drummond will contribute to this increase. Colombia’s thermal coal exports in 2009 are forecast to increase by a further 4 per cent to 73 million tonnes, underpinned by additional capacity expansions.

US thermal coal exports in 2008 are forecast to increase by 11.5 per cent to 27 million tonnes. US exporters have benefited from supply disruptions in the Atlantic market (particularly South Africa) and the weaker US dollar. US exports are forecast to remain at around 26 million tonnes in 2009 as limited supply growth from other Atlantic market exporters supports the demand for US coal.
Australian export earnings from thermal coal to increase
In 2007-08, Australian thermal coal exports were 114.9 million tonnes, an increase of 3 per cent on 2006-07. The relatively slow growth in exports reflects infrastructure capacity constraints and significant damage to a number of mines in Queensland following heavy rain in January and February 2008.

According to initial data from the Australian Bureau of Statistics, the value of thermal coal exports in 2007-08 increased by 23 per cent to $8.3 billion.

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 16 months will help to alleviate some of these constraints.
In the first half of 2008, expansions at the ports of Gladstone and Dalrymple Bay in Queensland were completed, adding 28 million tonnes and 8 million tonnes a year to port handling capacity, respectively. A further 17 million tonnes expansion at Dalrymple Bay is scheduled for completion in early 2009. In addition, a 4 million tonne a year expansion at the Abbot Point coal terminal, also in Queensland, is expected to be completed in 2009. A number of rail projects under construction in New South Wales and Queensland are scheduled to be completed over the next 16 months which will also increase export capacity.

In 2008-09, Australia’s thermal coal production is forecast to increase by 4 per cent to 192.4 million tonnes. In the first quarter of 2008, Xstrata’s Glendell mine (4.5 million tonnes a year of raw coal) and an expansion of Anglo Coal’s Dawson Complex (3.5 million tonnes) were completed. A number of other projects are scheduled to commence operation in the remainder of 2008 and in 2009. These include the Liddell washplant upgrade (an expansion of 4.2 million tonnes), Rocglen (1.5 million tonnes a year) and Narrabri (2.5 million tonnes) coal projects.

Reflecting higher production, Australian thermal coal exports are forecast to increase by 7 per cent to 122 million tonnes in 2008-09. Earnings from thermal coal exports are forecast to more than double to $17.8 billion in line with higher export volumes and contract prices.