13.   MACRO-ECONOMICS AND COMMODITY PRICES

13.4.1  

Introduction

It is estimated that world hard coal production in 2004 was 4.3 billion tons and the tonnage of internationally traded coal 754Mt. Some 82% of coal is therefore still consumed in its country of origin. The reason for this is that four of the world’s most populous countries consume predominantly indigenous coal, namely the USA, China, India and Russia.

Whereas traded coal represents only 18% of the total it represents a significant proportion of the coal consumed in Japan, the developing Asian economies and North-west Europe.

During the last decade, with the price of coal weak, there has been a tendency for the resource majors to invest in existing properties rather than develop new greenfield projects. From this process we have seen the emergence of three major players in the Atlantic sea borne coal trade, namely BHP-Billiton, Anglo Coal and Xstrata. In the Asian region, exports by these three players are augmented by those from Rio Tinto and Bumi Resources of Indonesia.

An inevitable result of this has been the exercise of greater market discipline in the industry and a tendency to optimise their export portfolios to meet the demands of the market. This is very different behaviour to that practiced in the past where coal companies faced with low pricing would try to maintain or even increase production to lower their cost base in order to live with lower market prices.

Nearly 70% of coal use currently occurs in power generation, 12% in steel making and 12% in industry, with the balance going to domestic and residential use. However, virtually all of the future increase will be directed into the power generation sector, which is expected to use 79% by 2030. The market for coking coal is expected to grow only very slowly, as improvements in technology enhance efficiency or result in greater use of thermal coals.

13.4.2  

The World Steam Coal Market

The trade in steam coal can be split into two distinct regions, namely the Atlantic and the Pacific. Both regions have predominant suppliers although coal does move between the two different regions. The predominant suppliers into the Asian region are Australia, Indonesia, China and Russia. In the Atlantic region these are South Africa, Colombia and Russia.

On the back of increased imports of commodities by the Chinese to support economic growth, sea freight rates have risen dramatically effectively blocking exports of steam coal from the Pacific producers Australia, China and Indonesia into the Atlantic region.

The traded market for steam coal has been growing steadily year on year and in the last five years has been supported by growing exports of steam coal from, predominantly, Australia, China, Indonesia, Colombia and Russia. In 2005, exports of steam coal stood at 567Mt.

The export steam coal market has experienced an unprecedented surge in prices since the end of 2003. The primary reason for this was the good recovery in world economic growth during this period and stagnant exports from China and South Africa. Although spot prices have declined from the highs experienced in 2004, they are still at levels significantly above average historical prices.

During this time, demand for coal in the Atlantic region has been high, inter alia, as a consequence of high gas prices. The growing markets were, principally, the United Kingdom and North America. The main beneficiary into the United Kingdom was Russia where it has been able, in addition to picking up the increase in demand, to displace South American coal. South African coal has marked time in terms of tonnage and hasn’t been able to benefit from the upsurge in demand, primarily due to logistical bottlenecks.

The South American producers have probably not been too concerned about losing market share in Europe, since they have been able to benefit from the growth in North American imports. In the USA imports have continued to grow as Central Appalachian production of lower sulphur compliance coal has declined. Virtually all this growth has been met with imports from South America since this coal has a tremendous geographical advantage.

Currently, there are signs that supply and demand in the Atlantic region are in closer balance, but although prices might ease they are not expected to fall rapidly in the short term. Gas prices are still high, giving coal, in spite of its own increase in price, advantages over gas in major markets such as the United Kingdom and North America.

In the longer run, it is believed that there will not be a basic shortage of coal. There is evidence that the major suppliers are restricting supplies, but overall there are enough plans already in existence or capable of being implemented to meet the likely demand for internationally traded steam coal to 2010. By 2015, the need for major greenfield development, in addition to expansion of existing mines, will become more important to meet both the increasing demand and the exhaustion of existing mines.

13.4.3  

The World Metallurgical Coal Market

Metallurgical coal quality requirements are more stringent than those for thermal coal, with the result that there are fewer supply sources for this material. The degree of coking characteristics differentiates the coal between hard, semi-hard and semi-soft.

There is increasing overlap between the thermal and metallurgical coal sectors as steelmakers attempt to redress coke shortages or to reduce costs by introducing semi-soft or non-coking coal into their production processes, including the growing application of blast furnace coal injection (“PCI”), with low volatile PCI coal being the most popular fuel adopted as an injectant.

The steel industry has shown only modest growth in the last two decades, with output declining in the developed countries and growth occurring mainly in the economies of northern Asia, specifically South Korea and Taiwan. Following the currency crisis of the late 1990s, even these economies slowed. Now, evidence of growth in steelmaking across the world is being seen, very much led by the expansion of steel demand and production in China. Other developing countries, like India and Brazil, are expected to follow in the footsteps of China.

Until 2003, the market for metallurgical coal supplies into the steel industry has shown only modest growth and has been constrained in its price aspirations by a steel industry that was suffering from low profit margins.

This has forced a degree of consolidation on both the steel industry and the coal producers. The latter had relatively little impact until the last two years when the emergence of China as a major producer and consumer of steel and growing importer of coking coal, combined with an improving world economy, has exposed a shortage of prime coking coal across the world. This led to historically record price levels.

Based upon projected good quality coking coal production increases on a worldwide basis, the tightness in the supply/demand balance will last for the next two years before easing and coming back into potential oversupply in 2008 or 2009. Currently, in Asia a significant proportion of the coal used for injection is semisoft coking coal. This coal will probably be displaced by ultra low volatile coal, thereby forcing the semi-soft grades into the coking and steam coal sectors.

In Europe, high volatile PCI coal has a strong place in the market and can be priced to be competitive with ultra low volatile PCI coal, primarily due to lower freight costs. In some cases producers will have to accept a reduced price to compensate for its lower value in use. Supplies of USA high volatile coking coal are declining and steel producers in Europe and South America are looking for alternatives.

In India, a high proportion of the new coking capacity that is coming on stream uses heat recovery technology that it is claimed can employ high levels of semi-soft and semi-hard coals in the blend. South African semi-soft coking coal should be well suited to this technology.

13.4.4  

South African Coal Exports

Most of the South African coal exported is classified as thermal coal. The greatest proportion of metallurgical coal is semi-soft and PCI coal. A small amount of anthracite is also exported to the domestic and industrial markets in Europe. By far the most important single steam coal market for South African coal is Europe, the Mediterranean and North Africa, although the Indian sub-continent will become increasingly important as the economies of India and Pakistan grow. South African coal exports having risen steadily from a level of 45Mt in 1985, but have stagnated at a level of about 69Mt since 2000. From the mid-1990s the focus of exports has shifted towards Europe and Southern Asia away from Northern Asia. South Africa’s main problems in terms of export volumes centre on infrastructure bottlenecks. Richards Bay, which is the major export channel, has a potential throughput of 72Mtpa but has been held back from achieving this by railage problems. These are being addressed.

13.4.5  

The Richards Bay Coal Terminal (Source: Richards Bay Coal Terminal Company Limited)

Background and History: Richards Bay Coal Terminal Company Limited is situated in the deepwater port of Richards Bay and is the largest single export coal terminal in the world. It was established in the early 1970s and has been expanded from an initial 12Mtpa to its existing export capacity of 72Mtpa. Richards Bay Coal Terminal is owned by Anglo Coal, Xstrata Coal, Eyesizwe, Ingwe, Kangra Coal, Sasol and Total Coal SA.

Expansion: Richards Bay Coal Terminal will expand from its existing capacity to 92Mtpa. This includes the original Phase V expansion, which has been underway for some time. The total cost will be approximately ZAR1 billion and the expansion is expected to be completed by July 2008. The precise phasing of the incremental export tonnage is subject to colliery and rail infrastructure developments and will be determined once the projects that will utilise the increase in terminal capacity have been identified. Initial estimates, however, indicate that the full rail and mine capacity will only be available after 2009. Key highlights of the expansion are:

• Special provision will be made to encourage a new generation of coal exporters by earmarking up to 4Mtpa by April 2006 for emerging BEE exporters.
• South Dunes Coal Terminal, which will be a two-thirds BEE controlled company, will take up 6Mtpa of the expansion.
• 10Mtpa of the expansion capacity will be opened up for subscription to all with an emphasis on empowerment to facilitate the transformation of Richards Bay Coal Terminal, in line with the continuing transformation of South Africa’s coal industry under the Mining Charter.

The subscription capacity of 10Mtpa will be made available through new shareholding or through commercial usage arrangements at internationally competitive rates, as this expansion is in line with the lowest cost coal port expansions globally. This has been made possible by the Richards Bay Coal Terminal shareholders, who are underwriting the expansion and relinquishing their pre-emptive rights to the expansion capacity.

13.4.6  

The Markets for Kumba Coal

Kumba operates two export coal mines. Grootegeluk produces steam coal for the nearby Matimba Power Station as well as export-quality steam, semi-soft coking and PCI coal, for both the domestic and export markets. The expected expansion of the electricity generation capacity at the Matimba Power Station will require increased output of steam coal and will result in the concomitant expansion of export steam and metallurgical coal production. Leeuwpan produces both thermal and metallurgical coal for the local and export markets.

Kumba’s export products are primarily exported to Europe, South America and the Indian sub-continent. In the Atlantic basin, it competes primarily with coal exported from Columbia, Venezuela and Russia and in the Indian markets it would compete predominantly with coal exported from Australia, Indonesia and China.

Kumba’s export products are primarily exported to Europe, South America and the Indian sub-continent. In the Atlantic basin, it competes primarily with coal exported from Columbia, Venezuela and Russia and in the Indian markets it would compete predominantly with coal exported from Australia, Indonesia and China.

13.4.7  

The Markets for Eyesizwe Coal

Matla and Arnot are mine mouth operations tied in with Eskom’s Arnot and Matla Power Stations. The North Block Complex, comprising Glisa and Strathrae and New Clydesdale Colliery supply coal to the domestic market. New Clydesdale Colliery also exports coal to the international market.

Exports:

Eyesizwe Coal has an entitlement of 1.2% at the Richards Bay Coal Terminal equating to 864ktpa based on the current RBCT capacity. Furthermore, Eyesizwe has been able to secure an additional export entitlement under the BEE/Common User programme. It has also signed a MOU to enable it to participate in South Dunes Coal Terminal, which would result in the company obtaining a further 500ktpa entitlement. In addition, Eyesizwe intends to apply for part of the 10 Mt subscription tonnage under the recently announced RBCT expansion programme.

Eyesizwe’s main export markets are Israel, Germany and the UK. The company also sells to coal traders who export to other markets.

Inland:

New Clydesdale Colliery was established as an export mine with a small amount of 180ktpa being targeted for the inland market. However, due to the Eskom’s increased coal requirements, New Clydesdale Colliery has also been supplying coal to Eskom. Glisa Colliery has been producing for the domestic industrial market and only commenced supplying Eskom in 2003, as does Strathrae Colliery. Eskom has become a very important contributor to North Block Complex’s growth prospects. This Complex has recently signed a new three-year agreement to supply approximately 1.4Mtpa to Eskom’s Majuba power station commencing 1 January 2006.

13.4.8  

Coal Pricing Forecast

The models employed to arrive at the coal demand forecasts took account of factors such as expansion in facilities utilising coal (especially power plants), inter-fuel competition, economic growth projections, the levels of energy and competing fuel prices and environmental and technological considerations.

On the supply side the impact of industry restructuring, market prices, exchange rates, transport infrastructure and industry production costs were taken into account.

The forecasting models indicate that prices will decline in all markets from the current inflated levels in the short to medium term as greater supply and demand balance is achieved, resulting from increased production spurred by the high prices.

The forecasting models indicate that prices will decline in all markets from the current inflated levels in the short to medium term as greater supply and demand balance is achieved, resulting from increased production spurred by the high prices.

Price premia for the different metallurgical coal grades are expected to moderate from current inflated levels as prices return to their forecasted long-term average levels.