Study attributes greater volatility to China's entrant as major coal exporter

Insight, Inc., a private company formed to bring together the two most respected economic and financial information companies in the world DRI and WEFA, on Wednesday announced the results of its annual report on international seaborne steam coal trade and prices. Among its major conclusions, the study finds that China's aggressive entry into the steam coal markets over the last two years has been a significant factor in maintaining stable prices. However, Global Insight's analysis points out that possible changes in China's commitment to the international steam coal market could cause delivered prices to rise by up to 50 percent.

According to the study, "International Seaborne Steam Coal Trade and Prices: 2002-2025," globally traded volumes grew by almost 30 percent between 1999 and 2001 to reach 400 million tonnes (Mt). Volumes are expected to grow to around 520 Mt in 2010 and reach almost 600 Mt by 2020. The majority of this growth is predicted to come from the Asia/Pacific markets, with only limited growth elsewhere.

The study concludes that developments in infrastructure will permit all traditional sources to supply further amounts of coal. In the shorter-term, increased demand will be met by small increases from South Africa, China, Colombia and Indonesia. Australia will dominate the growth in the longer- term. Further, the price of coal has traditionally been driven by cost. This is not expected to change. In recent years, producers have improved productivity substantially and improved mining methods have significantly reduced the capital cost of developing new mines. These trends will continue and costs in real terms will decline in all producing regions. Analysis of mining company results over the recent past confirms that at a period when prices have been low in historical terms, record profits have been generated in the coal mining sector. Prices will continue to fall in real terms over this forecast period.

Commenting on the results of the report, David Goldsack, Global Insight's coal service director, said "Whilst on the face of it all looks calm with growth set for a steady 5 percent per annum and prices set to fall in real terms, there are threats that could dramatically change this picture." He clarified, "Firstly activity in the short-term markets, driven by new financial trades in coal that give rise to short-term volatility and uncertainty, make the understanding of the market fundamentals ever more important. There are occasions when the forward curves totally belie the market fundamentals.

Secondly, I remain skeptical about the Chinese presence in the market as asupplier over the long term. Withdrawal could happen at a moments notice which would totally disrupt this view."

The study looks at demand in over 40 importing countries and the supply from the 10 main producing countries, together with how production costs and market factors will determine price development in the future. (*)