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Coal Sourcing Strategies

Market Dynamics

For much of a decade, new market dynamics have been redefining historical coal industry norms.   From 2004,  export FOB prices began to climb steeply, driven by supply-demand imbalances and infrastructure cost inflation, until export prices more quadrupled, relative to the stable pre-2004 baseline, as markets peaked in the summer of 2008 before coming down again, though not to the "old " levels.

Although the overall global demand for steam coal has weathered the credit crisis and is expected to continue to climb, especially in Asian markets, it is anticipated that over the long term thermal coal prices will trend down, over the short and medium term relatively high prices are more likely to prevail, especially whilst logistics bottlenecks persist.

Additionally regulatory and climate change concerns in Europe, Australia and North America  have produced initiatives and legislation aimed at reducing the environmental impacts of coal-based  power, indicating uncertain prospects for imports into European markets.
The number of suitable supply jurisdictions is limited. While new coal supplies will come online, not all of them will be available to the seaborne market and many are expected to be outside normal thermal coal quality specification ranges.

Strategy

Given this market background, what are coal importers doing to insure both the security of their supply and of their bottom line?  Increasingly, this is becoming an era of niche coal trade, where end power users design their business chains - from sourcing to blending to contracting, even to boiler design - around a specific set of strategies designed to hedge against supply and price surprises.

Use of mine- or at least technically-specific coals is becoming more common, as generators are turning to coals traditionally considered too low in CV (see here) or to  post-combustion treating of emissions from coals with nitrogen, ash or sulphur contents previously considered too high.  Specialized blending regimes are also becoming more important in the search to use off-spec coals.

Novel, long-term approaches are becoming increasingly prominent as well.  Where in the past coal consumers had put out more limited tenders as stockpiles needed refreshing, more and more they have been turning to multi-year, or even decades long, hedging instruments based on indexes or forward curves.

The global seaborne thermal coal trade is undergoing rapid change and, in tandem with all energy markets, it looks like just the beginning.  Nevertheless, savvy consumers can take the opportunity to use the turbulence in the markets to develop new strategies and financial instruments, ensuring  some degree of stability in the choppy seas ahead.


Energy Edge Partner Martin Bloemendal has over 25 years experience in energy, coal and logistics markets and is well-known for developing market concepts  which improve competitive edge.  If you have questions concerning coal sourcing, please feel free to contact  him  today.








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