Energy warning for global cement producers

Energy warning for global cement producers
Published: 27 December 2010

The possibility that steam coal prices could rebound sharply in 2011 is becoming a major talking point in European and Asian energy circles. In essence, a steady upward pressure on supplies, with annual demand gains now averaging around seven per cent, are likely to be exacerbated by coal shortages in China this winter. This in turn may prompt domestic buyers, including those in the local cement sector, to push for additional coal imports. Some reports say China will need as much of 100Mt of purchases from Australia, South Africa and Indonesia in 2011. Similarly, increased Indian demand next year could see this Asian cement powerhouse bring in an extra 15Mt of steam coal imports. And all at a time when major coal suppliers in all the main export regions are said to be suffering from production problems due to weather, logistics and, in some cases, shipping congestion in the main export centres.

Under such a scenario, export FOB prices for regular grade steam coal – basis 6000kcal/kg – could move up quickly from a current US$115/t FOB basis Richards Bay, South Africa, or US$125/t level out of east coast Australia to levels of between US$130-150/t, respectively in the first half of 2011. Some traders are betting on an overall 9.5% jump in steam coal prices in 2011, although some commentators see this latest surge as more of a winter-led price spike rather than a sea-change in pricing dynamics.

Echoing such pricing developments, Reuters has just reported that prompt physical coal prices rose by around US$3/t in mid-December, due to growing concerns about supply problems in the key exporting countries of Colombia, Australia and Indonesia. A December loading of South African coal traded at US$116.25/t whereas a January delivery for northern European buyers traded up at US$122.00/t – again up by US$3/t on recent previous fixings. Traders said they had been surprised by the depth of supply disruption in Colombia, Australia and Indonesia and some market participants have been scrambling to find standard-grade coal in Europe, although Russian supply alternatives – popular with cement producers in northern Europe – are now badly affected by winter icing and seasonal railway disruptions.

But at the same time, if the coal market is to experience such rapid price gains, then demand for alternative fuel-grade petcoke could climb as buyers switch to this now-competitive fuel, currently on offer out of the US Gulf at around the US$130/t level. Analysts indicate that Chinese buyers might double their 2011 intake of petcoke to the 6Mt mark, while increased demand from North Africa, Turkey and South America (particularly Brazil) could push up petcoke sales – and prices – significantly. Hence, fuel-grade petcoke is likely to track upward in line with steam coal price movements.

Fortunately, this evolving pricing scenario for steam coal and petcoke should not be further aggravated by any real upward movements in bulk freighting costs. As of now, all the main dry bulk sectors face continuing downward pressure on rates as a result of a weakness in many dry bulk commodity trades, at a time when a growing over-supply of tonnage, including extensive newbuild deliveries, put further pressures on ship owners to continue trading at close to break-even levels. A modicum of good news for buyers looking to fix further supplies of coal and petcoke before winter really starts to bite!