SA misses coal boom

Fri, Dec9, 2011

London - South Africa's coal exports are surging into 2012 just when top spot buyers China and India are out of the market and supply bottlenecks elsewhere have eased, so it will have to fight for market share, eroding prices in a fundamentally weak landscape.

South Africa has the port capacity to export 81 million tonnes a year of coal from Richards Bay Coal Terminal, but in recent years the tonnage shipped has been far lower at about 64 million tonnes due to rail bottlenecks.

Exports in 2012 are forecast at around 70 million tonnes due to operator Transnet Freight Rail's (TFR's) improved railing rate, exporters and analysts said.

Even if TFR cannot sustain its target 1.6 million tonnes of coal a week moved to Richards Bay, after years of doubt and stinging criticism exporters expect rail rates to rise enough for an extra 7-10 million tonnes of exports.

"I think there's a lot of room for prices to come down - I wouldn't be surprised to see $85.00 a tonne FOB Richards Bay then rebounding back to $105 next year,” said Jaime Correal, analyst at Wood Mackenzie in Annapolis.

Exporters who have enjoyed fat margins on sales at over $100 against cash costs of about $60 are weighing up their likely profits on a higher volume sales at lower prices.

South Africa will export 21 million tonnes of coal in Q4, only slightly less than the 27 million shipped in the first half of the year, following a dramatic performance improvement by rail operator TFR.

Benchmark South African prices FOB Richards Bay have fallen from January’s highs of over $130.00 a tonne to about $100.00, on weakening fundamentals which will bite harder and push prices down in the coming year.

"Isn't it ironic that South Africa gets its act together on railings just as China withdraws from the market?," one major European trader said.

"It's the coal without any visible means of support because it isn't yet pricing in to any market in the world," he said.

This year began with a price spike and supply disruption due to floods in Australia's Queensland state and the Japanese tsunami. Indonesia and Colombia's output was hampered by severe rains and South Africa's exports seemed set for a shockingly low total of under 57 million tonnes.

"Last year almost every exporter had problems - but this year it's the reverse, nobody has a major problem exporting and South Africa is shipping at a totally unexpected rate," one major South African exporter said.

"It's bearish next year and the South African exporters are not in the best position to be trying to increase sales now," said Emmanuel Fages, an analyst with Societe Generale.

But some are unconvinced that TFR can keep up the pace.

"The performance of TFR has really improved lately but it's not clear if it will be sustainable or whether they'll start to have problems again," said Jaime Correal, coal analyst with Wood Mackenzie.

"For this reason and because of strong domestic demand, we expect a slow growth in South African exports to 68 million tonnes maximum next year and slowly beyond that."

Retired drivers save the day

Among numerous TFR initiatives this year, the re-hiring of locomotive drivers had a dramatic impact on productivity, exporter, rail and transport sources said.

"TFR re-employed 26 retired or semi-retired train drivers; their knowledge is very important, they know how to handle a train and can do their own minor repairs," one source said.

These experienced drivers are able to drive new longer trains with many more jumbo wagons over some challenging parts of the line prone to derailments, and can save hours by avoiding the need to send out repair teams.

The move to a scheduled rail service, infra-red inspections of rail track (two potential derailments were averted that way) and raised security to prevent cable theft all played a part.

Rising quantities of American coal bought 1-2 years ago at discount prices are being shipped to Europe, increasing the pressure on South African sellers to shift sales to Asia.

India has been the biggest single buyer of South African coal since 2007, much of it now sold under term contracts but from next year India's biggest trade importers say they will buy spot only and will seek cheaper alternatives where possible.

"There's no doubt that some of the Indian buyers with index-linked term contracts have really suffered and will be more short-term buyers," another major exporter said.

India has been out of the spot market for several months and in the meantime, China absorbed the unwanted tonnes.

China is now the second-largest buyer of South African coal and absorbed about 9.5 million tonnes in January-October, roughly a fifth of the country's exports and a huge increase.

South Korea, which has reverted to buying standard grade coal, is also expected to buy more from South Africa.

"China and India, especially China, are such a huge price influence and the Chinese buyers like South African coal so as long as freight rates remain fairly low, it will still be competitive into China," the second exporter said.

(sourced Reuters)

Australia govt: 20 pct of qtr coal exports lost to floods

* Gov't forecasts 20pct of Australia's quarterly coal exports lost to floods
* Around 7 pct of cotton plantings also lost
* Cockatoo, Aquila make headway at coal mines leave force majeure in place (Wraps ABARES data, Rio Tinto, Aquila)
By James Regan

SYDNEY, Jan 21 (Reuters) - Australia's devastating floods, which shut mines and damaged rail lines, could cut coal exports by around 15 million tonnes, or 20 percent this quarter, even as collieries show signs of recovery, the government's commodities forecasting agency said on Friday.
Coal ports in hardest-hit Queensland state escaped severe damage, but are still operating well under capacity as a result of lower coal receivals, Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) said.
ABARES estimates flooding due to monsoon rains that started in November could lower coal export earnings by A$2.0 - $2.5 billion ($1.97-billion-2.47 billion) during the quarter to March 31.
"Coal production at affected mines has been reduced because of a number of factors, including flooded pits and difficulties in removing the water, and a lack of access to mine sites because of flooded roads," it said.
Australia was forecast to export 160 million tonnes of metallurgical coal and 158 million tonnes of thermal coal in fiscal 2011, according to ABARES.
Cockatoo Coal and Aquila Resources on Friday partially resumed operations in hardest Queensland state as floodwaters continued to recede.
But in the aftermath of one of Australia's worst natural disasters on record, mining companies say operations are still far from normal: Vital rail corridors linking mines with export terminals are only slowing being reactivated and force majeure -- a legal let-out enabling miners to break sales contracts without penalty -- remain in place across Queensland.

COAL OPERATIONS
Aquila, which mines 2.8 million tonnes a year of metallurgical and thermal coals from its Issac Plains mine in 50-50 partnership with Brazil's Vale warned it would still take some time to resume full operations. Cockatoo Coal said mining at its Baralaba operations would not start before February.
The Baralaba mine suffered some of the worst damage during the flooding after a levy protecting the lode collapsed sending a torrent of water into the pit.
Flooding at other mines -- most concentrated in the inland Bowen Basin -- was restricted to rainwater.
"Whilst all equipment is in working order, resumption of full production rates will take some time while dewatering of the site is completed, Cockatoo said.
It only expects to restart mining in February once pit dewatering provides improved access.
"A phased program of dewatering/mining is then expected to continue for several weeks as the mine returns to planned production capacity (about 150,000 tonnes per quarter)," Cockatoo said.
Suppliers of pumping equipment needed to empty water from the mines have said they will be hard-pressed to meet demand and environmentalists are concerned the water may pose health risks.
The flooding has been blamed on rains triggered by a La Nina Pacific weather pattern that has devastated huge areas of the eastern seaboard.
Rio Tinto RIO.L> this week said its Queensland coal mines were operational but still constrained and left its force majeure declaration in place. .

BHP Billiton , the world's largest supplier of sea-borne hard coking coal via a joint venture with Japan's Mitsubishi Corp , is bracing for lower production over the next six months in the aftermath of the flooding, which trimmed December quarter output by a third.
The flooding has driven contract prices for coking coal as high as $225 per tonne for the first quarter of 2011, compared to $209 per tonne in the fourth quarter of 2010.
Spot prices have shot up to more than $350 per tonne and consultants Wood Mackenzie said prices could reach $500.
This will mean higher second-quarter contract prices, based on average daily spot prices over the previous three months.
But a quicker-than-expected return to production would likely end the upward trajectory in coal prices, according to Patersons Securities analyst Andrew Harrington.
"This happened after flooding in 2007/08 caused the price to go up and then fall back," Harrington said.

WHEAT QUALITY DOWN, COTTON HIT
ABARES also estimated flooding cut agricultural production by at least A$500 million to A$600 million in 2010/11.
It said the winter harvest, including wheat, barley and canola, in most of the flood-affected regions was either complete or near completion before the recent flooding.
But a wet harvest means Australia, usually the world's fourth biggest wheat exporter, could see more than 10 million tonnes of wheat downgraded in quality to low quality milling wheat or feed wheat. A wet growing season means a near record 26 million tonnes of the grain could be harvested nationally.
ABARES also estimated that around seven percent of Australian cotton plantings, valued at A$150 million in 2010-11 was destroyed and a further 2 percent were at risk if the crops did not have the opportunity to dry out.
The 2010/11 Australian cotton harvest could be 3.95 million bales, 8 percent below an earlier estimate but the July to June year harvest would still be a record, exceeding the 3.52 million bales harvested in 2001/02, Rabobank said in a report last week. (4.4 bales equals 1 tone)
The wet weather in Queensland has had a limited impact on other mineral and energy commodity production concentred further north of the coalfields
The one notable exception was Rio Tinto declaring force majeure at its Boyne Island aluminium smelter. Force majeure was lifted on Friday after road and rail access to the port of Brisbane was restored .
(Additional reporting by Bruce Hextall and Balazs Koranyi; Editing by Ed Davies, sourced Reuters)