Commodity Blog

Commodity Prices - Coal

Japan plans to offer loans to power producers in the U.S. and Australia that buy so-called clean coal generators from Japanese manufacturers, according to a government document obtained by Bloomberg News.

Funding from state-owned Japan Bank for International Cooperation would help drive sales of the plants that cost about $3.1 billion apiece, said a senior trade ministry official involved in producing the 113-page draft plan, due to be released today. The ministry said in an e-mail it will brief the media on a report about clean coal at 4:30 p.m. in Tokyo.

Mitsubishi Heavy Industries Ltd. and Hitachi Ltd. compete with General Electric Co. and Germany’s Siemens AG to supply plants that convert coal into gas before generating power, making it easier to trap carbon-dioxide emissions. Japan wants to benefit from new demand for clean energy after world leaders including U.S. President Barack Obama pledged to back technologies that reduce gases blamed for global warming.

“The government’s marketing campaign will be a big plus for Mitsubishi Heavy in the competition to capture the market for ‘green technology,’” said Futoshi Usui, a Tokyo-based analyst at Credit Suisse, who rates the stock “outperform”.

Steel companies must consider shelving all growth capex plans as soon as possible if the global steel industry is to have a sustainable future, Credit Suisse warned in a report Wednesday.
Warning of the dangers of oversupply in coming years, the bank added that failure to achieve this would ultimately lead to further forced plant closures, likely rounds of protectionism and subnormal returns for potentially the next decade at least.
Explaining the new dynamic driving steel markets in the wake of a 450 million mt drop in global steel demand, the bank said we have returned to supply-led cycles, like the 1980s and 1990s, where regardless of a potential 3–5% global demand growth trend once the cycle has normalized, the level of excess capacity means that supply fluctuations will drive the cycle for steel again, and not demand.
If the steel industry proceeds as it had planned with plant capacity additions, there is a real risk of far greater excess capacity than in the 1980s and 1990s and consequently utilization rates that are structurally too low to sustain the industry in its current form, CS warned.
To illustrate the magnitude of the likely oversupply problem, CS produced forecasts of new capacities, predicting 90 million mt of capacity would be added in 2009, 95 million mt in 2010, 89 million mt in 2011 and 76 million mt in 2012. In every year, China accounts for 40–60% of additional capacity, with India in second place.

A Japanese steel producer said Monday that metallurgical coal buyers have accepted that sagging global steel demand doesn’t warrant the cancellation of all unwanted contract tonnage in the current fiscal year, but they are still holding out for suppliers to cancel some high-priced fiscal 2008 term deliveries. The source also said 2009 contract prices may have to be settled higher than in 2007 to allow for long-term sustainability in met coal supplies.
Representatives of market leader, BHP Billiton-Mitsubishi Alliance, kicked off FY 2009 talks with their North Asian customers in late-January, and have told buyers that “a contract is a contract,” the Japanese source said. BMA is expected to resume talks in Japan later this month, the source added.
Previously, market sources said Asian steel mills are finding it difficult to take delivery of their outstanding contracted FY 2008 coal tonnages and buyers were hoping that the current situation could be considered a force majeure condition.
EARLY 2008 PROJECTIONS MISSED THE MARK
FY 2008 tonnages for annual contracts starting April 1 were procured at record-high prices in early 2008. Prime hard coking coals from Australia and Canada were priced at about $300/mt FOB, largely as a result of flooding in the main Australian metallurgical coal-producing state of Queensland in early 2008, and partly due to harsh winter conditions in Canada.
In early calendar 2008, the metallurgical coal supply situation was extremely tight, forcing steelmakers to cough up high annual prices for their FY 2008 coal supplies. Mills also entered into contracts for additional tonnages on top of projected requirements for FY 2008 in anticipation of events that could further constrict supply–such as mine accidents, weather disturbances and equipment failure.
Projections made in early 2008 were too optimistic and were overshadowed by the global financial meltdown, which started in mid-September and sent commodities pricing and freight rates on a downward spiral. For the mills, the financial crisis meant they had to cut down on their steel production. This put them in a quandary regarding how to deal with outstanding, high-priced, contracted 2008 tonnages that they no longer required.
BMA LIKELY TO FIND PROPOSAL HARD TO SWALLOW
In late January 2009, BMA informed its customers that FY 2008 contracts must be honored, the Japanese source said. However, buyers are still negotiating with their suppliers to reduce the delivery of a portion of their outstanding FY 2008 contracts.
“We know this kind of proposal will be very hard for BMA and other suppliers to accept,” the Japanese source said. “We want to talk to our suppliers on a commercial basis, not on a legal basis,” the source added. The Japanese coal buyer also said that the FY 2007 price of $98/mt FOB for prime hard coking coal “is too low” as a price settlement for FY 2009. He said he personally believes that FY 2009 prices should settle at between the FY 2007 and FY 2008 prices, suggesting a price of $120 to $150/mt FOB.
“We don’t want our suppliers to go under. We have to think of future availability of coking coal. Pressuring suppliers to agree to very low prices for 2009 will not be good for buyers in the long term,” the source said.

Iron, coal prices to halve contract prices for Australia’s iron ore and coking coal exports are forecast to halve. The dour outlook comes from Access Economics, which expects the Australian economy to fall into recession as growth slumps in China. The crisis and the effects on the domestic economy are expected to deepen as commodity prices fall because of reduced global demand.

In its Business Outlook, the Canberra economic agency says the ”spectacular fall from grace” of commodity prices will slash tax revenue and cause businesses to shelve investment in infrastructure and project development.
There are concerns that, as mines shut down or reduce capacity, the benefits of the next boom could be missed when the economy and the resource cycle turn.
“We’re amid the largest market meltdown in modern history,” Access says.
“Commodity markets came to this late but they saw the same shocking rout in pricing recently seen in many markets.
“We’ve long thought that commodity prices have had to come back, substantially so.
“We didn’t think the blow-up would come this soon or be quite this spectacular, but blow up it has.”
The Access analysis finds that spot market prices are back to the level of five to six years ago, with current weakness abolishing all of the gains.
The unprecedented rise in commodity prices delivered the Government a revenue windfall of at least $40 billion, causing the surplus to balloon.
As the credit crunch pushes the world into recession, Access forecasts that April contract coking coal and iron ore prices will be halved.
Access’s outlook is more negative than that of Goldman Sachs, which says iron ore prices will be off by up to 30 per cent as demand sours.
“Given what has happened to global steel prices, we expect coking coal and iron ore contract prices to be slaughtered come April, with steaming coal prices to also be hit hard,” Access says.
“It took four or five years for the good news to build on industrial commodity prices. It will take rather less than two years for the bad news to carve a very large and painful chunk from Australian incomes.”
In its broader outlook, Access said it believed mining output would be cut back to 7.8 per cent in the next two financial years but the greatest pain would be felt in the resources labour market.
As the national jobless rate edges up to 4.5 per cent, it is predicted that thousands of mining and resources jobs will be slashed as profits fall..
Access forecasts an 11.4 per cent decline in the number of mining jobs in the next financial year, as mining capacity is cut back.
But Access predicts the jobless figure will then rebound slightly to slow workforce growth of just 1 per cent.
“Mining has been the powerhouse of the Australian economy in recent years, with the income it earned encouraging a rapid lift in investment and firing up a bunch of other sectors,” the agency said.
The negative outlook for the Australian economy is now shared by NAB, which believes a technical recession will be narrowly avoided in the next year.
In a revised outlook, the bank’s economists tipped that the economy would contract by 0.2 per cent in the final quarter of the past calendar year.
NABCapital chief economist Robert Henderson said the prospects for the economy would be grimmer if agriculture did not strengthen after recent rains.
“Our current forecasts for Australia have the economy just missing by a whisker the shorthand recession definition of two quarters of negative growth,” Mr Henderson said.
“The forecasts include a strong contribution from the farm sector as the drought breaks and the rural economy bounces back.
“Under most definitions, Australia’s non-farm economy is in recession now and we will remain there until the middle of the year.”

Reduced global steelmaking in 2009 will cut demand, push supply into surplus and halve the price of coking coal, forecast analysts Alan Heap and Alex Tonka at Citigroup Global Markets. They forecast that global steel production will fall 4.2% next year-to an estimated 1.403 billion metric tons-as mills continue to cut production in the face of weakening demand.

Under such a scenario, Heap and Tonka expect coking coal prices to fall 50% to an annual average $150/metric ton next year. “Spot prices had gone to the moon, to record levels, before the financial meltdown,” says Jim Thompson, editor of Coal & Energy Price Report, an industry newsletter, who expects 2009 prices to settle around $200.

Spot prices for metallurgical coking coal used to make steel increased as high as $300/metric ton throughout Asia in the first half of 2008 (depending on supplier and buyer), up from an average $120 in 2007. The price was due to strong first-half steel demand in India, China and some other Asian nations-and to numerous supply problems. The regional disruption hasn’t affected prices in the European Union or North America, where the delivered price of $110 was only slightly above the 2007 average of $95.

Steelmakers in China already have begun lobbying for calendar-year pricing for iron ore, rather than fiscal-year contracts-and some analysts expect the same to happen in the coal contracts. “Many U.S. steelmakers already have settled on 2009 prices, which were phenomenally high,” says Thompson of the Coal & Energy Price Report. “I doubt those settlements will sit now and suspect they will be renegotiated.”
Heap and Tonka add that “this cycle has seen an unprecedented level of steel production cuts,” so the Citigroup analysts believe that continuing curtailments in production are likely to result in delays to price settlements. “Neither producers nor consumers see it in their interest to settle annual prices in such a turbulent market,” Heap and Tonka write.

Sherritt International Corp.’s [TSX:S] CEO says the company expects significant growth from its coal assets following its acquisition of Royal Utilities Income Fund, as high oil prices make coal an attractive fuel option.
“There is no way this country will leave 70% of its energy — which is in the form of coal and 25 times cheaper than oil — in the ground while its citizens have to bear dramatic cost increases to heat their homes,” Jowdat Waheed told shareholders at the company’s annual meeting in Toronto.
“Your company has placed a multi-billion dollar bet on its belief that coal, in different forms, will be one of the most important fuels in the energy mix of the future”.
Sherritt. said in March it was buying back the outstanding units of Royal Utilities Income Fund [TSX:RU.UN], owner of Canada’s largest thermal coal producer, in a C$704-million deal that will allow it to invest more money in its coal business. The deal closed last month.
The Ontario Teachers’ Pension Plan, a long-time partner with Sherritt on a number of transactions, agreed to part with its 41.2% stake in Royal Utilities in a lock-up agreement under the Sherritt plan.
Teachers has been recently selling off assets as it prepares to close a C$52-billion deal for BCE Inc. [TSX:BCE], although that plan suffered a serious setback Wednesday when Quebec’s highest court ruled that the terms of the agreement were unfair to BCE’s bondholders.
Waheed said Sherritt has been working through “the smorgasbord of sometimes conflicting regulations on carbon emissions to develop Canada’s first large-scale coal gasification project for commissioning in 2012.”
Royal Utilities indirectly held all the shares of Prairie Mines & Royalty Ltd., the largest thermal coal producer in Canada, which supplies coal-fired power plants in Alberta and Saskatchewan.
In addition to the coal assets, Sherritt also holds nickel, cobalt, oil and natural gas, and electricity holdings in Canada, Cuba and elsewhere.
Waheed said high metal prices will keep revenues high, noting that the challenges will relate to execution — building and staffing its operations to meet expansion plans.
“In our Ambatovy joint venture (in the African island nation of Madagascar), we are fully mobilized on construction activities but probably six to nine months away from having full complement of key operating personnel on the ground,” he said.
“We do need to wait a bit here as some staff can only get released from our Moa expansion (in Cuba) as key stages are completed.”
Sherritt shares traded Thursday at C$15.23, up five cents, at the Toronto Stock Exchange.