The consequences of Japan’s multifaceted disaster – the earthquake, tsunami and now its nuclear crisis – appear to be widening by the day.
Now its impact on thermal coal is beginning to slowly unfold. Although the outlook for the commodity is bearish in the very short term as Japan’s economy slows down and, with it, demand for coal-fired power stations, it looks set to emerge as a top beneficiary of the disaster.
Japan is the world’s largest importer of thermal coal and its demand therefore influences the $100bn physical market and the much bigger derivatives market for the commodity.
Over the short term, coal demand for prompt delivery has fallen in Japan, as economic activity and electricity consumption slows. Moreover, several thermal power plants and import terminals have been damaged, forcing utilities such as Tokyo Electric Power Co and Tohoku Electric to ask miners to defer cargoes.
The slowdown, coupled with little appetite for foreign coal in China at the moment as domestic prices are low, is holding down demand and prices in the Pacific basin. The price in the Australian port of Newcastle, which sets a benchmark for the Asian region, is holding at about $128 per tonne, below the 2½-year high set in January of $135.10 a tonne.
Emmanuel Fages, coal analyst at Société Générale in Paris, says that beyond the short-term impact, he anticipates greater coal imports to replace the nuclear plants that have been shut down in Japan. “So the impact could be bearish for the prompt contracts as long as port operations do not resume, then turn bullish,” he says.
Thermal coal in the Pacific is already quite tight, particularly after flooding in the Queensland state of Australia hit production. Any extra demand from Japan – which traders put at about 500,000 tonnes per month in the second half of the year on top of the expected monthly buying of 10m tonnes – could further tighten it, pushing up prices.
The negotiations for the 2011-12 annual contracts in Asia, which faced a deadline of April 1, are now postponed. But when they restart in a few weeks, traders and analysts expect a settlement in excess of the $125-a-tonne record of 2008-09. Traders said that Xstrata had tabled before the crisis an offer at about $140-$145 a tonne, with Japanese utilities led by J-Power offering to pay about $130 a tonne.
Ironically, the impact of the Japanese crisis could be far more acute in the Atlantic basin, rather than in the Pacific. Japanese utilities will not only run their coal-fired power stations harder to replace nuclear power, but will also buy more liquefied natural gas to produce electricity. LNG cargoes, particularly from Qatar, will bypass Europe, pushing up gas prices in the UK and continental Europe.
“Japan will use a combination of oil, coal and LNG for power generation,” says Didier Hussein, director of energy markets at the International Energy Agency in Paris.
The stronger and more sustained increase in gas prices in Europe is already making coal a more attractive option for generating electricity. The so-called “dark spread”, the profit margin made from burning coal and selling the resultant electricity, is higher than the equivalent “spark spread” for natural gas.
The demand for coal in Europe is set to rise after Germany temporarily idles a third of its nuclear capacity in the wake of the disaster in Fukushima, forcing utilities there to turn to other fossil fuels to bridge the gap. Coal prices in the Atlantic basin have risen nearly 10 per cent since the earthquake struck Japan, hitting the highest level since October 2008. In Rotterdam, coal rose on Thursday to $132.40 a tonne.
Beyond the next few months, the potential for a shift away from nuclear power towards coal is the buzz among mining executives and traders. “Over the longer term we see it as very bullish for coal as the ‘anti-nuke’ groups gain greater voice now worldwide, particularly in Europe,” a top coal trader says, echoing a widely held view.
As such, some see current events as another sign that the commodity, already reinvigorated by strong demand from developing countries such as China and India, is again the King Coal that once dominated raw materials markets.