SA coal out of sync with global prices

Launceston — Coal prices around the world are gently sliding as demand from top importers such as China, India and even Europe remains subdued amid a so far mild northern winter. However, there is one exception.

SA coal export prices at Richards Bay have surged in recent months, defying market fundamentals and seemingly without logical explanation.

The daily Richards Bay index, as assessed by commodity price reporting agency Argus, jumped 44% from $56.54 a ton on September 25 to a recent high of $81.30 on November 28.

It has since retreated slightly to end on Wednesday at $81.30 a ton, but the Richards Bay outperformance over other benchmarks has been staggering.

The price of thermal coal delivered into northwest Europe dropped 16% from a recent high of $64.07 a ton on September 16 to the close on Wednesday of $54.04.

The weekly index for benchmark Australian thermal coal at Newcastle port has traded sideways in recent months, going from $63.22 a ton in the week to September 27 to $65.31 in the week to November 29.

Looking together at the three price benchmarks it is clear that the movements for SA coal are wildly out of step with what is going on in the other major regions.

There is no obvious fundamental reason this should be the case.

There is neither supply shock for exports from Richards Bay, or a sudden surge in demand for either SA coal specifically, or coal from other exporters of a similar quality.

Richards Bay exports were 6.08-million tons in November, according to vessel-tracking and port data compiled by Refinitiv, down slightly from 6.89-million in October.

However, it is worth noting that October was the best month since December 2018 and November’s exports were the fourth-highest for any month this year.

The bulk of SA’s coal exports head to Asia, with India ranking as the biggest buyer.

India’s imports of coal from all countries did tick up in November to 16.36-million tons from 14.78-million in October.

But the increase was not driven by additional demand for SA coal, with India’s imports from Richards Bay coming in at 2.99 million tonnes in November, up slightly from 2.69-million in October.

Trading play

If fundamentals can be ruled out as behind the increase in SA coal prices, the explanation most likely lies in trading tactics being used by market participants.

The motivation is likely to be to create arbitrage opportunities between physical and paper markets, or perhaps also to influence prices linked to longer-term contract negotiations.

While this may lead to winning some short-term profits, it risks damaging the longer-term integrity of the market.

There is little chance that buyers of SA coal across South Asia will accept paying a substantially higher price than what they could pay for similar quality Australian coal.

If the Richards Bay price continues to deviate from other prices, buyers will be reluctant to purchase SA cargoes, or demand a discount mechanism, or a switch to alternative pricing.

If an index price loses credibility or trustworthiness, it ceases to be of much use to the industry.

This is by no means a criticism of the methodology or integrity of compiling the indices, which have robust procedures and checks in place.

If prices being offered and traded are genuine, there is little the price reporting agencies can do, especially if some players withdraw to the sidelines out of fear of taking losses, or a reduction in the liquidity in the market.

Overall, apart from possible short-term profits, there seems to be nothing to be gained by having one global coal price benchmark out of whack with the others.

It serves only to make coal an unattractive financial market, something an industry already under siege for its role in climate change would be best advised to avoid.

Reuters