METALS AND MINERALS — Coal industry gears up for second export boom

Coal is a mineral commodity that rarely captures the interest of investors and mining analysts. That perception may change now that the outlook coal markets is improving in response to economic activity gathering steam in the U.S., Europe, Japan and Southeast Asia.

AME Mineral Economics, an Australian-based firm of mineral economists, says 1994 will probably be recorded as the “turning point” for the world coal industry, as it was then that the long-forecasted and long-awaited increase in demand began to take shape. This increase amounted to around 2.5%, and equated to 86 million tonnes of coal; it was attributed to economic recovery in most Western nations, continued growth in Asian economies, and unseasonable weather in some countries. A shift in the production and consumption balance also occurred, resulting from the restructuring of coal industries in Russia, Poland and some European countries.

AME says 1995 was a “boom year” for the world coal industry, far more so than than anyone had suspected, with demand at record levels. The result is that, for the first time in more than 10 years, terms such as “seller’s market” are more than just a producer’s dream.

Indeed, the firm says the scene is set for an interesting period, as price negotiations begin to take shape between Japanese steel mills and Australian hard coking coal producers. The Japanese have been seeking “any way possible” to diminish their reliance on Australian supply, following the higher-than-expected price rise in early 1995. These negotiations are reportedly being conducted in an atmosphere of mutual mistrust, as each side remembers the actions of the other from previous years.

The Japanese will not be wanting increased prices. However, AME says they may have to accept them in order to support the benchmark system and their role as price-setter. The end result is expected to be a rise in hard coking coal prices for 1996, of around US$2.50 per tonne. Anything higher, the firm says, “will send the wrong message to the industry, potentially leading to an oversupply situation.” In any event, the outcome is expected to set the benchmark for much of the world trade in coking coal in 1996, and have an impact on steaming coal prices down the road.

In its recent report, Export Coal 1995-96: The Second Boom, AME predicts that the improved outlook for coal will continue until after the turn of the century, fueled by what is expected to be a massive increase in energy demand, particularly in Asia.

Nations that have low-cost operations and an excess of supply over demand are expected to experience significant increases in production and exports, while coal production and exports from nations with high-cost operations will decline. AME predicts that Indonesia, Colombia, Venezuela and Australia will be the beneficiaries of this trend, and that Germany, Poland and Russia will experience reduced production levels and mine closures.

In order to meet the forecast demand in steaming and coking coal, an extra 145 million tonnes of export production will have to be developed, AME predicts. The source of this additional production will be current major exporters (which, surprisingly, are few and far between.)

Coal exports account for only 11.5% of total hard coal production. Exports from the U.S., for example, account for only 6% of that country’s total coal production, and China’s exports account for 2%. Exports from the Commonwealth of Independent States (the former Soviet Union) account for 5% of total production.

In contrast, Australia ships 80% of its total production, making it the world’s largest exporter. Canada, which has 14 mines, takes second spot, followed by Colombia, China and Indonesia.

AME expects new production capacity will be developed in Australia, Colombia, Indonesia and Venezuela, in order to meet increased export demand. However, it points out that the international coal trade “has not been profitable for many players for a long time.”