South Korean power generators are putting into action their stated plan to book more US thermal coal with approximately 1.5 million mt destined to arrive at Korean ports between July and September, said a market source Wednesday.
All five Korean power utilities have purchased US thermal coal cargoes for Q3 delivery, and the specification of the coal involved is understood to be 4,850 kcal/kg NAR, said one source familiar with the matter.
The shipments are coming from a port on the western seaboard of Canada, possibly Vancouver which is home to the Westshore coal terminal, said the source.
One motivation for Korean utilities to take more US thermal coal is relatively high prices of similar calorific value Indonesian thermal coal, which have fluctuated widely since late last year.
Indonesian 5,000 kcal/kg GAR grade coal was trading at $63/mt FOB Kalimantan on a 90-day basis this week, and peaked at $77/mt in mid-November 2015, according to S&P Global Platts data.
US thermal coal on a 8,800 Btu/lb GAR basis, which is equivalent to 4,880 kcal/kg NAR was trading Tuesday at $56.16/mt FOB Vancouver, according to Platts prices.
For the quickest route to Korea, across the Pacific Ocean, current Panamax cargo freight from Vancouver to Japan is $10.70/mt, indicating a delivered Japan price of about $66.90/mt CFR for US 4,850 kcal/kg NAR thermal coal.
US thermal coal can be blended with other origins, particularly higher grades from Australia and Indonesia, according to the specifications of Korean power plants, sources said.
CONSUMPTION TAX
Another spur to Korean buying of US 4,850 kcal/kg NAR thermal coal is the pending April 1 increase of Won 6,000 ($5.33/mt) in the Korean government's consumption tax on imported thermal coal, said the market source.
"US thermal coal below 5,000 kcal/kg NAR will attract the lowest [rate of] consumption tax," said another market source.
US thermal coal with a calorific value of 4,850 kcal/kg NAR would fit into the lowest tier of the Korean government's consumption tax which applies to imported coal under 5,000 kcal/kg NAR, he said.
For the lowest band, the consumption tax rate is changing to Won 27,000/mt post-April 1, from Won 21,000/mt, currently.
Thermal coal ranging from 5,000 to 5,500 kcal/kg NAR attracts a higher rate of consumption tax at Won 30,000/mt from April 1, up from Won 24,000/mt at present.
And, for the upper band of the consumption tax which applies to imported thermal coal higher than 5,500 kcal/kg NAR the rate is Won 33,000/mt from April, rising from Won 27,000/mt now.
Sources close to the Korean market flagged in January that a significant quantity of US thermal coal was expected to be delivered to the Northeast Asian country later in the year.
One cargo of US thermal coal that arrived in Korea in January is understood to have traveled from a US port on the Gulf of Mexico via the Atlantic and Indian Oceans, said another market source in Korea.
Korean power companies have freight agreements that provide vessels on a long-term basis at fixed prices, providing an incentive to send ships on long voyages to Colombia or the US, sources said.
Two US coal producers with mines in the vast Powder River Basin covering the US states of Montana and Wyoming are known to have served the Korean market in the past few years, but their shipments have tailed off in recent months.
One is Signal Peak Energy -- partly owned by commodities trading company Gunvor -- that produces bituminous thermal coal in Montana, and ships exports via Canada's Westshore terminal.
And the other is Wyoming-headquartered Cloud Peak Energy which produces sub-bituminous coal for customers in the US and Asia, according to the company's website.
Korea imported 1.05 million mt of US bituminous thermal coal in the 2016 year, according to Platts data.
For the 2015 year, Korean imports were 670,000 mt for US bituminous thermal coal and 555,000 mt for US sub-bituminous thermal coal, said the data.
