Diversification pays dividends for South Korean thermal coal buyers

South Korean thermal coal buyers have been working hard over the past year to diversify their supply sources and take advantage of price arbitrages in the seaborne market, according to an S&P Global Platts analysis.

Trade and customs data for South Korea showed that operators of power plants fired by imported thermal coal have increased their purchases from non-traditional supply sources such as Canada, Colombia, and the United States.

These three countries typically supply customers in the Atlantic Basin market - including Europe, where demand for imported thermal coal is shrinking. The countries accounted for 10.6 million mt of South Korea's 109.5 million mt of imports in 2017.

South Korea has more than tripled to 7.8 million mt in 2017 its intake of thermal coal shipments from South Africa - a swing supplier to the Atlantic, Indian, and Pacific seaborne markets - up from only 2.2 million mt in 2016.

At the same time, South Korean thermal coal buyers have more or less kept steady their purchases from traditional suppliers such as Australia and Russia at about 31 million mt and 16 million mt, respectively, last year.

Indonesia increased its thermal coal shipments to South Korea in 2017 to 41.2 million mt compared with 36.3 million mt in 2016 when South Korea's total intake from the seaborne market that year was 93 million mt.

Several market factors have fostered the growth of Atlantic seaborne exports to South Korea, which is the third largest export market in East Asia for thermal coal shipments after China and Japan.

According to Platts' data, delivered prices in the South Korean market as shown by Platts' NEAT index are high enough to attract cargoes away from the European market where CIF ARA delivered prices have been lower. Colombian has been consistently cheaper for South Korea than Russian thermal coal shipped the short distance from Russia's Pacific ports.

The expansion of the Panama Canal to accommodate larger ships could allow thermal coal shippers to trim 17 days from the 45- to 50-day voyage for Capesize ships sailing from Colombia to South Korea. But canal user fees of about $300,000 for a Capesize ship would reduce the potential savings of a shorter 30-day Pacific Ocean voyage, such as from lower bunker fuel costs on a reduced sailing time.

Still, a number of South Korean power utilities have pursued a flexible strategy in their long-term sea freight contracts to take advantage of competitively-priced Colombian thermal coal.

They have redeployed Capesize ships operating on the Australia-South Korea vessel route to the longer return voyage to Colombia, although three deliveries can be made by a Capesize ship from Newcastle to Korea in the time it takes for a ship to return from South America.

By taking an inventive approach to purchasing and shipping imported thermal coal, South Korean buyers have been able to keep in check the marketing muscle of traditional suppliers and save money on power station fuel costs.