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China's coal market impact challenges Newcastle benchmark, traditional supply routes

By James O'Connell in Singapore

November 28, 2011 - China’s rapidly expanding coal-fired installed capacity has radically altered traditional global supply demand trade routes in the last three years, when for the first time the North Asian nation became a net importer of thermal coal.

This swift nature of this move caught many market players by surprise in 2008 but as we close out 2011 it is challenging established thermal coal benchmarks with the standard benchmark FOB Newcastle 6,000 kcal/kg NAR under threat. (See related chart: Daily Coal Price Trends – Physical: Aug 26 - Nov 24, 2011).

Furthermore, even miners in the United States are casting their eyes over a lucrative market that could help breathe life back into its industry and break the negative growth story in that region. What lies ahead?

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The immediate answer is new FOB Australia assessments. The coal industry has seen the launch of delivered China assessments and while one has traded a few times neither has aggressively captured the imagination of the trading community.

One underlying reason for this is the basis for the pricing of high calorific coal in Asia has been removed – volume.

Liquidity in the Newcastle benchmark has been sliced in half and "this suggests the index is losing relevance…particularly in the face of increasing importance of China," Hayden Atkins, Macquarie analyst wrote in mid-November. (See related chart: Liquidity in Newcastle physical spot: 2009-2011).

He also raised questions as to how such a benchmark could be representative "of current market pricing which has implications for expectations of coal prices achieved by miners."

The decline of liquidity in the FOB Newcastle 6,000 kcal/kg NAR has seen a separate product grow in importance – a 5,500 kcal/kg NAR product which the Chinese traders and end users have consistently and with repeatability pursued in the market.

Daily Coal Price Trends – Physical: Aug 26 - Nov 24, 2011

Platts is naturally not sitting still. Over several months it has been engaging with the Asian coal community and is proposing the first ever 7-45 days thermal coal assessment for FOB Newcastle 5,500 kcal/kg NAR.

We continue to solicit feedback until December 12, 2011, and feel free to contribute to this project with an email to myself or to with your thoughts.

"There are probably two factors that have affected NEWC liquidity. First is the drop in Japanese demand this year, although this is looking smaller than expected with the loss this year ~5 million mt. More important seems to be the rising importance in Chinese demand for Australian coal, which is based on competitiveness of import vs. domestic coal. At no point have NEWC prices been competitive with Chinese domestic coal this year, and it seems that none of the increase in tones to China (expected to be rise 4.5 million mt in 2011) is being priced anywhere near the NEWC index," Atkins said and goes even further to suggest: "With China accounting for all of the incremental thermal coal exported from Australia this year, this raises questions about how representative the NEWC index is of the marginal tonne of coal currently being priced in the market." (See related chart: Australian marginal tonne of exports to China: Jan 2010 - Sep 2011).

On a wider basis, the massive consumption boom in electronic goods, automobiles and the ever increasing rural to urban migration pattern has been fuelling the economic growth that has seen the Middle Kingdom record double digit GDP growth year after year. China should no longer be viewed as a producer nation; it’s fast becoming a consumer nation.

The urbanization of China has seen traditional three-generation family homes break up while migration patterns are no longer seasonal, but permanent or semi-permanent.

Almost exactly half of China’s 1.35 billion population now lives in an urban environment a sea-change from 1990 levels of about 26% – resulting in the housing boom and each new apartment creating additional white-goods demand.

Experts suggest this workforce flow is unlikely to stop any time soon with forecasts ranging between 60-70% in terms of urban population by 2035.

Next page: World’s largest coal producer becoming a major importer

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