Australia flooding tightens regional thermal coal supply, supports prices

Singapore — Asian thermal coal supply is expected to tighten due to the floods in eastern Australia that have disrupted rail freight, impacted loading operations and are likely to delay shipments in the coming days as weather conditions worsen, but the impact on metallurgical coal operations has so far been limited, according to analysts and sources.

Tighter supply from the Port of Newcastle is supportive for thermal coal prices, and comes just ahead of India's usual strongest demand period over April and May, when buyers restock for the monsoon season, which usually runs from May to September.

Other importers exposed to extreme Australian weather include South Korean utilities, which have already expressed buying interest in Indonesian coal following recent closures of nuclear reactors in the country, according to sources. They might be forced to look further afield to alternatives like Russian high calorific value coal.

Chinese power utilities are not expected to have major requirements for coal, although some bullish sentiment has been noted from downstream consumers, sources said, while Japan has ample renewables electricity generation and generation fuel inventories coming out of the peak winter season, reducing its need for thermal coal.

Spot coal prices to jump

"The port of Newcastle handles around 70% of Australia's thermal coal exports, and around 15% of its met coal exports. The wet weather is expected to continue until March 24, and it could be the end of March before all railings to port return to normal," Matthew Boyle, S&P Global Platts Analytics' lead analyst for Global Coal & Dry Bulk Freight, said.

Boyle said however that the Australian thermal coal export forecast for 2021 of 199 million mt had not been adjusted due to the floods or issues with coal shiploaders at the NCIG terminal, and coal stocks at ports were adequate to continue shiploading despite a lack of coal railings to port.

"We expect coal producers will look to make up lost exports in the second quarter of 2021, so the overall impact on exports, when considered on an annual basis, will be limited," Boyle said.

"We do however expect spot coal prices to jump on the supply disruptions," he said, adding that high calorific value thermal coal prices were already indicated above $90/mt FOB Newcastle and could climb to the $100/mt level on news of the floods by the end of March.

"This would be a near-term resistance price level, and if breached, which we believe it could, would hit an almost two-and-a-half-year high," Boyle said.

S&P Global Platts assessed the price of Newcastle 5,500 NAR at $57.50/mt on March 23, up 50 cents on day.

Muted impact on met coal

Metallurgical coal market participants said there was minimal disruption to Bowen Basin production in Queensland state, but they will be monitoring higher water levels at rivers and creeks. Rainfall at mining sites in Central Queensland and ports is expected to continue for a few weeks amid the monsoon season.

"We lost two or three days of production at both sites last week. I would expect to see similar falls this week," a coal producer said.

An international trader said that there had not been "any material impact on mining and logistics" so far, but noted that it would "take time to fully assess the damage or rail washouts inland."

"The weather disruption could make an already tight market even tighter," the trader added.

The uptick in thermal coal prices has resulted in higher prices for other grades of metallurgical coal, mainly weaker grades of met coal like pulverized coal injection and semi-soft. This is because the pricing of these grades of coals are interlinked depending on their energy composition.

As thermal coal prices move up due to the floods, a producer can also command higher prices for the pulverized coal injection and semi-soft.

A Northeast Asian trader described the market for weaker coals as a "sellers' market" in the near term.

Price spreads between premium hard coking coal and weaker metcoal grades have narrowed due to differing market dynamics --- the premium hard coking coal is cheaper due to ample supply as China has been blocking imports from Australia, while prices of pulverized coal injection and semi soft are higher due to the floods.

S&P Global Platts assessed Premium Low Vol Coking Coal, a premium hard coking coal, at $111.50/mt FOB Australia March 22, down $1/mt on day.

The ratio between premium hard coking coal and pulverized coal injection stands at 96%, and 89% for semi-soft, based on Platts assessments basis FOB Australia March 22. Both ratios had been the highest since the indexes were launched in October 2011.