The Atlantic Basin thermal coal markets – The present and the future

We recently had the opportunity to catch up with the president of Doyle Trading Consultants (DTC), Ted O’Brien, to find out his view on the current and future outlook of the Atlantic Basin thermal markets.

Ted joined DTC in the Colorado office in 2007 and moved to open the New York City office in 2008. In 2011, Ted assumed the role of President.

He is active in the New York investment community, meeting with institutional clients to discuss the global coal sector.  He has delivered presentations in North America, South America and Europe on various topics related to the global coal markets and frequently travels through the U.S. and global coal fields to stay abreast of market developments.  A member of the North Carolina Coal Institute and the New York Coal Trade Association, Ted is currently serving on its Board of Governors.

Colombian coal exports have underperformed over the past few years, putting pressure on supply into the European market.  Have these disruptions had a big impact on Atlantic Basin thermal prices?

Ted: Colombian exports have overcome a litany of obstacles in the past 24 months – numerous FARC attacks on Cerrejon’s operations, strikes at Cerrejon and Drummond, loading disruptions at Drummond due to environmental restrictions and the barge loading accident, disruptions at Goldman Sachs’s La Francia, and rail line FENOCO’s restrictions due to noise complains.  Two things are clear – the Colombian government means business and is not afraid to lose royalties as they uphold environmental standards, and the seaborne coal market did not miss the disruptions from Colombia one bit. 

Last year, prompt year API 2 fell nearly 20% to $82/MT, despite the fact that Colombian exports fell to 73.6 mm MT from 79.7 mm MT.  The reason?  Some South African coal shifted back into the Atlantic Basin as competition from Indonesia ramped up.  In 2013, South Africa exported 70.24 mm MT, 21% of which stayed in the Atlantic Basin. That is up from 16% of 2012 exports of 68.34 mm MT.  Those additional tons into the Atlantic Basin were not needed, and more than offset the disruptions in Colombia.

Lastly, resilience in exports from the U.S. is a big factor behind weak Atlantic Basin coal prices, despite disruptions from Colombia.  The U.S. has traditionally been looked at as a ‘swing supplier’ to the seaborne market, given the high cost structure of many U.S. mines.  When the U.S. thermal market collapsed in 2012 due to unfavourable weather and low natural gas prices, U.S. steam coal exports to Europe jumped from 17.68 mm MT to 30.64 mm MY in 2012.  The ‘arb’ for U.S. coal into Europe quickly closed, but exports remained strong due to positions hedged by traders when the ‘arb’ was open, and exports fell just 3 mm MT to 27.50 mm MT in 2013.

Why does the U.S. have such an impact on Atlantic Basin thermal coal prices?

Ted: Since we are the ‘swing supplier’, we are the last to enter the seaborne market.  South Africa and Colombian coal industries are built around their export franchises, whereas the U.S. ships just 5% of our thermal coal overseas.  The longer the swing supplier stays in the market, the harder it will be to see prices move materially higher, barring an event.

So what is your outlook for the Atlantic Basin thermal markets in the next year?

Ted: I think the API 2 will be range bound in the $70 – 80/MT range through the balance of 2014.   Despite incredibly strong European demand, an abundance of supply from Colombia, South Africa, the U.S., and Russia will keep pressure on prices.  Colombian exports should rebound in 2014 and could 80 mm tons.  South African exports should post minor gains, but I don’t expect any major growth.  U.S. exports to Europe should fall 3 – 4 mm MT.  And Russia has shown little price sensitivity, so I don’t think any restraint will come.

What information can we learn from DTC’s reports on the current Columbian and South African coal markets?

Ted: We pride ourselves on the quality and timeliness of the fundamental analysis we produce.  We’ve gotten rave reviews from clients who appreciate our ability to provide insightful commentary on the ‘must know’ events, and our hustle as we scour the markets to determine what lies next for the seaborne coal industry.  Our reports include supply/demand analysis, price curves, output from our proprietary ‘Netback Calculators’ and ‘Generation Cost Calculator’, and a constantly evolving list of other catalysts that we track as we think they will impact the coal world.  We tend to believe you can only learn so much sitting behind a desk, so you’ll find we’re quick active touring the global coal fields, meeting with the industry’s movers and shakers, to get first-hand knowledge of what is happening on the ground.

You will be presenting at the 9th annual Russian & CIS Coal Summit this May in Moscow. What is the main message that you would like to share with the stakeholders at the summit? 

Ted: I will share our outlook for the Atlantic Basin thermal market, with particular attention to prices in South Africa and Colombia.  Ultimately, I think much of the future of Atlantic Basin coal prices depends on the involvement of the U.S., so I’ll share some highlights about why developments in the U.S. market suggest a more rapid decline in U.S. exports, and hence higher seaborne thermal prices, may be closer than we think.

Are there any other topics that you are looking forward to hear?

Ted: Very much so!  Adam Smith and Informa Conferences did a fantastic job lining up great speakers from all the key players in the Russian industry.  Of particular interest are the session on rail infrastructure, to get a sense of what new construction and development is taking place to handle additional coal volumes in the future.  I am also keen to hear from Raspadskaya Coal Deputy CEO Aleksandr Andreev, to get a sense for how Russian coking coal producers are coping in a $120/MT benchmark environment.  I ultimately hope to share as much insight, as I am sure I will gain!

Join Ted at the Russian & CIS Coal Summit, taking place on the 15th and 16th May at the InterContinental Moscow Tverskaya Hotel.  To find out more about the summit program and to register, please visit the Russian & CIS Coal Summit website.