Monday, December 15, 2014

Premium metallurgical coal prices nudge a touch higher

The Asia Pacific met coal market started the weak largely steady, though premium prices firmed on a slightly stronger demand outlook in China.

Last week's rally in domestic Chinese steel prices might have supported sentiment, said a steelmaker in East China.

Combined with weak iron ore prices, this uptrend has helped to widen mill margins, the mill source said.

Platts assessed Q235 5.5mm HRC in Shanghai, which has a tight historical correlation with met coal imports, at Yuan 3,050-3,070/mt ($497-500/mt) December 8, including 17% VAT, up Yuan 10/mt from first week of December.

This marks a rise of Yuan 50/mt since the start of this month.

One Shanghai trader stressed the greater appeal for January shipments for Chinese end-users, compared to December or February ones.

Most end-users had already restocked sufficiently for December, while steelmakers avoided buying cargoes loading in February as it would be within weeks of the Lunar New Year holidays, the trading source explained.

However, Chinese end-users were still cautious, with at least two purchasing managers from North China mills reluctant to fix spot deals as there was still uncertainty over the time frame of scrapping the 3% coking coal import tariff.

Platts assessed Australian premium low-vol HCC 25 cents higher from December 5 at $122.25/mt CFR China December 8, while tier-two HCC prices were assessed steady at $112.50/mt CFR China.

PCI prices soften a touch

Bids in the PCI segment were weaker.

Richer spot supply for January as well as cheaper domestic coals could put a stop to further price gains, one large steelmaker said.

The mill source said his procurement share of PCI imports had dropped from 70% in October to 30% of total consumption last month.

Both low-vol and mid-tier PCI prices fell 25 cents from first week of December at $101.75/mt and $94.75/mt CFR China, respectively.

At the Dalian Commodity Exchange, the most active May contract lost Yuan 4/mt from December 5 to close at Yuan 759/mt, while the May coke contract declined Yuan 7/mt to Yuan 1,032/mt compared with first week of December.

Q1 term talks set to begin

Elsewhere, Japanese quarterly contract negotiations were said to be starting in earnest this week following higher-level discussions last week, said a Japanese mill source.

For hard coking coal, a rollover (at $119/mt FOB) would be "the best outcome for both parties," the mill source said.

However, talk of BMA monthly contract offers at $116-118/mt FOB for January was undermining the likelihood of a rollover, he added.

The tight $1/mt spread between premium low-vol Peak Downs and premium mid-vol Goonyella -- down from $3-4/mt typically -- in the monthly offer could impact the price discussions.

The spread has narrowed in recent months as supply of premium mid-vol has tightened mostly due to poor performance at Anglo American's Moranbah North mine, participants said.

As a possible consequence, spot valuations for such coals outside China have also firmed.

A deal was done December 8 for a 40,000 mt cargo of straight Australian premium mid-vol with below 70% CSR, at $116.50/mt FOB Australia, for December laycan.

This was within 50 cents of two other deals reported concluded within the last five days.

Thursday, December 11, 2014

Tighter coal market in sight – Glencore

JOHANNESBURG ( – A natural tightening of the coal market as a result of demand catching up with supply will happen in the near future, says Glencore CoalCEO Peter Freyberg.
Freyberg, who was addressing Glencore’s investor day, made the point that coal is not in the same over-supply situation as iron-ore and that thermal coal is heading towards a supply deficit.
A graphic of consensus price forecasts, displayed during the investor day presentation, had coal in positive price territory in late 2015.
The London-, Hong- Kong- and Johannesburg-listed mining and marketing company has an installed capacity on a managed basis of close to 200-million tons of coal a year, across 22 mining complexes in three countries and backed by marketing offices in 19 countries.
Currently the largest exporter of coal from South Africa, Glencore Coal occupies premier volume positions in both Australia and Colombia.
It has cut $1.8-billion out of its costs since 2012 and its new production is firmly in the first quartile of costs, including its below-budget R8-billion Tweefontein Optimisation Project in South Africa, which is being commissioned six months ahead of schedule.
Glencore Coal achieved an earnings before interest, taxes, depreciation and amortisation (Ebitda) of 26% in the first half of the year and claims to have the best Ebitda of all the multi-continent diversified majors with a mix of thermal and coking coal.
Interestingly, Freyberg describes the company’s decision to stop producing in Australia for three weeks as pro-employee and union-backed.
Simultaneously, he reports that an opportunity exists to earn real export parities in Australia’s domestic market, where a large part of the industry is saddled with take-or-pay logistical obligations.
The resultant tightening of supply to domestic markets is allowing Glencore to create value by switching in and out of Australia’s domestic market as a result of its comparatively low take-or-pay exposure.
“Similarly, in South Africa, we're going to see more of that sort of behaviour as the market evolves,” says Freyberg.
The company has also succeeded in unlocking hundreds of millions of dollars a year in the synergies created through the blending of different kinds of coal.
“However, there are cycles and the industry is at a pretty bad time right now in terms of where the market is.
“Fortunately, we’re sitting at a pretty favourable part of the price curve with an average 26% margin in the first half and, with mines being wasting assets, we’re consuming them pretty rapidly at the moment as an industry, causing supply to drop off.
“That natural tightening, where demand actually catches up with supply, will happen in the near future,” says Freyberg, who adds that coal remains fundamental to Asian energy demand.
The further 255 GW of coal-fired generation that will be built in Asia by 2025 will require 800-million tons of coal a year, against the background of growing urbanisation coupled to the coal power being substantially more cost effective.
In India, for example, a dollar invested in coal-fired power generation delivers six times more energy than solar and four times more capacity than nuclear.
“When you go to the busbar, the actual cost of the coal energy is half that of solar and nuclear,” Freyberg points out.
But mine-expansion challenges remain and Freyberg outlines how community and economic issues have to be understood and open and honest engagement has to take place with communities to secure mining licences.
A case in point is the effort that Glencore went to to obtain a mining permit at Bulga, in Australia.
“You have to have a pretty good plan in place and you have to have a track record with the community to get through,” he says.
The company allows some of the 540 000 ha that it occupies globally to be used by host communities for agriculture, for example.
When Glencore acquired 13 mines in South Africa 14 years ago, the mines’ safety records were among the worst in the industry, which the company has succeeded in turning around.
Pictures were shown to investors of South African employees having pre-shift safety discussions at Tweefontein, where the focus on safety went hand-in-glove with the mine’s continuous miner team setting new output records in two seams.

Capital misallocation lowering commodity prices – Glencore

JOHANNESBURG ( – Capital misallocation, not a lack of demand, remained the key factor in the current low level of several commodity prices, Glencore CEO Ivan Glasenberg said on Wednesday.

Highlighting the need to differentiate by commodity in allocating capital, Glasenberg said at the company’s investor day in London that the commodity prices that had fallen had come off because of over supply.
He displayed a graphic that indicated a significant misallocation of capital in iron-ore in particular and defended his company against accusations that it was itself guilty of increasing coal supply, arguing that the addition of 18-million tons of coal into the seaborne coal market of 950-million tons a year was insufficient to lower the price.
He said that the London-, Hong Kong- and Johannesburg-listed company was dead against supplying in a manner that cannibalised businesses and had stopped Australian coal production for three weeks to avoid being forced to sell coal at poor margins.
He cautioned against viewing the internal rates of return (IRRs) of expansions in isolation and urged companies to view IRRs holistically and avoid being lured by their false attractiveness when viewed alone.
While it was important to cut costs and introduce technical expertise to reduce costs, setting out to go down the cost curve by increasing supply could have the backfiring effect of lowering prices overall.
“We know what happened in oil with the increased supply of shale oil, and we know what happened in iron-ore.
“But we also know that in commodities where there have not been big increases in supply, prices have gone up,” he said, displaying a graphic, which showed that the prices of nickel, aluminium and zinc had risen in the year to date and emphasised that differentiation by commodity was critically important.
He nailed the company’s colours to the multicommodity mast and reiterated the defence against falling prices of having a marketing role in addition to mining.
Commodities singled out for particular favour currently were copper, where the so-called surplus was proving elusive; zinc, where millions of tons of additional supply would be needed in the next half decade to balance the market; nickel, where the market would be balanced next year and fall into substantial deficit from 2018; and coal, where some high-cost supply was shutting and new investment was being delayed.
He said there was a market rebalancing in coal, which he reiterated would have a good future. A graphic of consensus price forecasts showed coal in positive price territory in 2015.
With Glencore’s long-life ferrochrome, copper, thermal coal, zinc and nickel assets in first quartile cost positions, it was a misnomer to say that the company did not have tier-one assets.
It was the only company without declining copper grades and had a list of brownfield growth options in copper, zinc, nickel, coal and oil, on which the button could be pushed beyond 2016.
“But these are not assets that will add new tons into the market and cannibalise the price and our existing operations. They’re small and they’re not going to move the needle.”
As the company’s brownfield oil option in Chad was on land, it could be kept shut until the oil price moved more in the company’s favour.
“That’s how we operate as Glencore. We do think that our trading skills stop us from increasing tons that are not going to give us a return,” Glasenberg added.
The company’s announced sustaining capital expenditure of $4-billion a year is expected to fall closer to $3.5-billion a year by 2017.
Continued optimisation of the asset portfolio is reportedly underpinned by target return on equity (RoE) of 20% to 25% for incremental mining capital and a sustainable marketing RoE of 40% to 65%.
The balance sheet structure for equity returns, liquidity and cost of capital is said to be optimal and the company’s Baa/BBB credit rating target keeps funding costs optimal.
The owner-managed concern has pledged to continue to return excess cash to shareholders and to complete 70% of its $1-billion equity buy-back by year-end.