Why Asia needs a new thermal coal price benchmark

September 12, 2018, 7:06 pm | Admin

When analysts and investors talk about thermal coal they are usually referencing the price of high grade material shipped from Newcastle, a port on Australia’s east coast.

For years this product, which is burnt in power stations to generate electricity, had been viewed as benchmark for the vast Asian market, including China and Japan. But for how much longer?

This year the price of Newcastle coal with an energy content of 6,000 kcal/kg has decoupled from other grades of thermal coal, raising the question of whether a new benchmark is needed to price billions of dollars of contracts across the region.

From its March lows, Newcastle 6,000 kcal has jumped 25 per cent to $113 a tonne, and is now trading at a record 75 per cent premium to a higher ash Australian product with a calorific content of 5,500 kcal, and which has dropped 12 per cent in the same period.

To put all that in context, the premium has historically averaged just 23 per cent, according to Credit Suisse.

So what’s going on?

Some believe the blowout in the premium is a result of consolidation in the Hunter Valley, the region of New South Wales that produces most of Australia’s high grade thermal coal.

Late last year, Yancoal, a state-backed Chinese company listed in Australia, paid $2.9bn to acquire Rio Tinto’s thermal coal mines in the region. It subsequently sold a 49 per cent interest in those operations to Glencore, the world’s biggest exporter of seaborne thermal coal.

“These deals saw the ownership of high energy Hunter Valley thermal coal become more concentrated, with these two companies controlling over 50 per cent share,” analysts at Credit Suisse wrote in a recent report. “We think that has been a major driver of the price increase.”

Unsurprisingly, Yancoal has been quick to dismiss any suggestion that its dealmaking exploits are to blame for the surge in premiums, telling local media that it reflected a lack of new mines and demand for high quality coal from the new fleet of high efficiency, low emission power stations being rolled out across Asia.

There is certainly something to that argument. But at the same time many Japanese utilities — the main buyers of high quality Australian coal for their specially configured boilers — have been purchasing supplies in the spot market after shunning annual contract negotiations. These are led by Glencore and broke down this year after disagreements on prices.

Given that 5,500 kcal Australian coal is predominately sold to China — and it closely tracks domestic prices — Credit Suisse reckons this is now a better proxy for the Asian coal market, rather than higher energy version that Yancoal and Glencore now control.

https://www.ft.com/content/4d148558-b67a-11e8-b3ef-799c8613f4a1

Last modified on September 14, 2018, 7:07 pm | 70