South African thermal coal miners are looking increasingly at the domestic market, with inland consumers more willing to pay higher prices than buyers in the export market and shipments out of the country falling, according to market sources.
S&P Global Platts assessed the FOB price of Richards Bay physical thermal coal basis 5,500 kcal/kg NAR and for delivery within the next 7-45 days at $70/mt. This is equivalent to Rand 917.83/mt for exporters of such material at Richards Bay Coal Terminal.
According to XMP Consulting senior analyst Xavier Prevost, the average price of sized coal in the South African domestic market is Rand 606.67-788.91/mt ($46.27-$60.17/mt) FOT for A and B grade coal, and he believes these prices and their projected increases would eventually shift a lot of exportable coal to the local market.
A grade coal has a minimum calorific value of 27.5 MJ/kg (6,568 kcal/kg), while B grade coal has a CV of 26.5-27.5 MJ/kg (6,329-6,568 kcal/kg).
"Inland prices are increasing a lot and export prices, regardless of what some analysts say, are not going to be good in the long term," he said.
According to recent research made by XMP Consulting, before 2009, domestic prices rose by an average 10%/year, with prices rising 8%/year over 2011-15 and 5% in 2016.
Even with South African 5,500 kcal/kg NAR thermal coal export prices reasonably high compared with the low of $37.50/mt FOB hit in October 2015 and FOB prices in the $40s/mt for large parts of last year, material sold inland is on a FOT basis at the mines, meaning that sellers are not saddled with extra export costs such as processing, rail transport to port, handling fees and port allocation.
In addition, many mines could achieve higher production yields by supplying the inland market, with B grade coal, which is what most inland industrial customers buy, according to the XMP Consulting research.
The research found that, as there has never been a formal price index for sized coal sold to domestic users in South Africa, miners have "generally taken their lead from each other and set their prices accordingly, with Glencore predominantly setting most prices." According to a letter to customers at the beginning of February seen by Platts, large miner Glencore has adjusted prices to charge as much as Rand 1,300/mt ($99.15/mt) FOT for sized-coal from its Tweefontein operations, Goedgevonden Colliery, Graspan Colliery and Wonderfontein Colliery.
According to Prevost, local coal sales were 181.2 million mt last year, split between electricity (66%), synthetic fuels (23%), industries (4%), merchant and domestic (4%) and metallurgical (3%).
He said sized coal was used by all industry, besides state-owned utility Eskom and synfuel and chemical company Sasol, with some users using small amounts of unsized coal and merchants buying any coal available and exporting some.
FALLING COAL EXPORTS
Another factor that could make the South African inland market increasingly attractive to mining companies is falling export demand. In 2016, South African coal exports declined for the first time since 2009. Shipments for the year were 72.81 million mt, 3.4% less from 2015's record high 75.39 million mt to their lowest annual volume since 2013.
Large miner Anglo American's 2016 thermal coal export sales were down 8% on the year to 34.1 million mt, according to its annual production report, while domestic sales for the year rose 9% to 34.5 million mt.
South 32's South African thermal coal unit sold 5.86 million mt of export thermal coal during July-December 2016, down 27% on the year. The company's financial year runs from July to June. Domestic sales registered a much smaller drop of 2% to 8.92 million mt.
Glencore did not provide sales totals for the year, but its South African thermal coal production for export in 2016 dropped 13% to 17.2 million mt, although output for the domestic market fell too.
Some factors will continue to promote exports, such as demand from routine buyers, take-or-pay rail agreements between mining companies and state-owned freight company Transnet Freight Rail -- 10-year contracts were signed in 2014 -- as well as penalties for volumes not delivered to RBCT under port allocation agreements.
