Australian metallurgical coal miner South32 has declared force majeure on its Illawarra coal Monday, due to unsafe gas levels and intervention by the regulator to halt production, three customers told S&P Global Platts Tuesday.
"The regulator issued a provisional notice to halt production," a market source said, quoting the force majeure notice that was sent Monday.
In a statement issued early Monday, South32 said it expects a "long outage" at its Appin coal mine due to unsafe gas levels.
When contacted Tuesday, a South32 spokesperson did not comment on the issue, saying: "We will continue to keep our stakeholders updated as details come to hand."
No exact timeline was given on how long the force majeure would remain in place, although some customers said they were told it would take at least two to three months.
The Illawarra coal product is a blend of coal from the Appin and Dendrobium mines where the former accounts for 60% of production and the latter 40%.
The Dendrobium mine still remains in operation, the South32 spokesperson confirmed Tuesday.
However, coal from Dendrobium cannot be sold alone, a market source said, and so even if production from Dendrobium is not affected, Illawarra coal might not be available for sale.
Earlier in May, heightened gas levels were detected at the Appin mine, resulting in state regulators eventually stepping in with a prohibition notice.
Gas has been a persistent issue for South32 at Appin mine, with the methane buildup previously causing the company to shut the mine in May and October in 2016.
Gas issues are more prevalent in mines located near Port Kembla in New South Wales state as they are all underground mines, unlike most of the mines in Queensland state which are open-pit mines, two mining sources said.
MIXED VIEWS ON POSSIBLE IMPACT
Illawarra coal is a premium mid-vol material which is traditionally popular in the Indian market.
The quality specifications are: 73% CSR, 23% volatile matter, 10% total moisture, 9.5% ash, 0.45% sulfur, 0.055% phosphorous and 2,000 ddpm maximum fluidity.
"Illawarra coals are popular in India," one steelmaker said and he expected India to be actively seeking spot cargoes.
Sources added that South32 does not have many term commitments to China for Illawarra and therefore the China market would not be directly impacted by the force majeure.
Some customers who are affected said they would have to look at other avenues to make up the volumes, with some saying that this would push up the premium mid-vol coal category.
There was already market talk of possible import of Mozambique coal into Port Kembla Monday though this was not confirmed at time of reporting. This was for a Panamax vessel from Nacala to Port Kembla for July 13-15 laycan.
One buyer said that he would have to be in the market soon for August laycan to offset this unexpected shortfall.
Another customer however, indicated that the problem has been around for the last two to three months without causing too much of a disruption in the market and hence he did not think the force majeure declaration would cause any impact on prices or supply.
The source however, did concede that sentiment could play a role in the near term.
The impact on supply will likely be exacerbated with ongoing strikes at Glencore's Oaky North coking coal mine, which also produces premium mid-vol HCC.
Workers have been protesting against Glencore since May to negotiate for better working conditions.
"Two mine issues are coming up at the same time... there may be some impact in the market," one steelmaker said.
South32's Illawarra metallurgical coal production had fallen by 9% to 5.3 million mt in the nine months ended March 2017, compared with the same period the year before. Illawarra coal is distributed from the Port Kembla Coal Terminal in eastern Australia and exported to customers around the world. Domestic steelmaker BlueScope is also a major end-user.
In addition to high quality premium mid-vol coal, South32 produces limited thermal coal.
"Met coal is a very volatile market, supply and demand is well balanced, if something happens on one side, it will have a big impact on the spot market," said one buyer.
Metallurgical coal prices have seen rapid price swings -- where spot prices of premium low-vol quadrupled within 2016, from $76.45/mt on January 4, 2016 to $310/mt FOB Australia $310/mt FOB Australia on November 8, 2016 due to supply outages in Australia and China, Platts data showed.
Prices have recently doubled this year due to a cyclone in Queensland, causing premium low-vol prices to hit $304/mt FOB Australia within three weeks on April 17.