Wednesday, 28 March 2012 |
Two US coal producers are preparing to ship one to two dozen cargoes of higher sulfur thermal coal to customers in China, if they are successful in concluding term contract deals currently under negotiation, market sources said Tuesday.
The US coal producers' plan is to export some higher sulfur cargoes to China in Panamax vessels from ports on the US Gulf of Mexico.
Other US cargoes would be loaded into 120,000 mt Capesize vessels at US eastern seaboard ports to minimize freight costs for the long distance voyage to China, market sources said.
"There is activity from Chinese buyers for US coal and it wouldn't surprise me if the US producers are trying to lock in large tons into this market given the state of their domestic market, which is terrible," one market participant in the Asia-Pacific region said.
Term contract deals for US higher sulfur thermal coal to European customers have been in place for some time, but few if any have been agreed for Asian customers, according to sources in the Asia-Pacific market.
US thermal coal with a calorific value of 6,000 kcal/kg NAR and 2.7% sulfur was heard offered to Asian buyers at $107-108/mt CFR China.
"A CFR price of $107-108/mt will not work into China, it is too high and needs to be nearer to $105/mt CFR," commented one trader.
Traders said that Chinese buyers would expect a significant discount of $5-7/mt on a cargo of US 6,000 kcal/kg NAR thermal coal with a sulfur content of 3%.
By shipping their thermal coal under longer-term contracts, US coal producers were trying to sidestep freight market volatility which could hinder future thermal coal sales to China, sources said.
Panamax vessel freight from the US Gulf of Mexico to China was quoted in the market Tuesday at $47-48/mt and Capesizes from the US east coast to China were priced at $36-38/mt, both up around $5 from two weeks ago.
Margins on sales of US higher sulfur thermal coal were already quite thin on trades struck in the past few weeks at prices in the low $100s/mt CFR China, and the current upturn in freight costs is starting to bite deeper into profits, said traders.
Sellers of US thermal coal were having to market their product aggressively to achieve spot sales into China and may be contemplating price cuts, market sources said.
Several sources expressed skepticism about the longer-term prospects for US higher sulfur thermal coal pricing into China and for term contract US sales to the country, given increased competition in the Asia-Pacific thermal market, rising seaborne freight costs and potential counter-party performance risk.
"The question for the US producers will be performance risk on the Chinese buyers, however, they are well accustomed to this from the track record of the US domestic utilities," said the Asia-Pacific market participant referring to a history of unsettled relations between some US coal producers and some utility customers.
"Hopefully, they have many customers lined up for these floating price cargoes. And, if there is a price fall the buyer will flake on a high sulfur coal for sure," commented another market source on the risks of term contracts for US coal sales into China.
US thermal coal's relatively high sulfur content is a relevant issue for Chinese buyers.
"Few Chinese buyers can take higher sulfur thermal coal," one trading source said.
Increasing US thermal coal's palatability to Chinese consumers requires a large amount of stockpile space and significant quantities of lower sulfur thermal coal for blending, two factors which might not be readily available to customers in China.
To blend down 100,000 mt of US higher sulfur coal could require 500,000 mt of low sulfur coal, and a stockpile area of equivalent size which could be difficult to find in China's congested ports, said traders.
Mongolian low sulfur thermal coal was seen as a good option as a blending agent for US coal, but market sources said infrastructure bottlenecks made shipping out this coal difficult.
Source: Mike Cooper, Platts
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