Xstrata upbeat on coal prospects

Brendan Ryan | Fri, 14 Aug 2009 08:17
[miningmx.com] -- THE thermal coal market “will boom again” according to Xstrata Coal marketing executive Murray Houston who predicted a swift return to the growth trend shown over the past 30 years.

Speaking during a visit by financial analysts and media to Xstrata Coal’s Goedgevonden colliery near Witbank, Houston said the market for seaborne traded thermal coal had shown an average compound annual growth rate of 10% between 1978 and 2008.

“Past recessions have interrupted growth but there has always been a rapid reversion to trend,” he pointed out.

Houston believed the thermal coal market would continue to be driven by economic growth from Asian countries and, in particular, China, India, Korea and Taiwan.

He said the thermal coal market was “essentially in balance” at present as rising demand for imported coal from China and India offset reductions from other sectors of the market. This was despite some 10 million tonnes (mt) of metallurgical coal being diverted into the thermal market.

Houston estimated that China currently produced 2.8 billion tonnes (bt) of its own coal but was rapidly becoming a net importer and imported 34mt during 2008.

He pointed out that China had its own “domestic seaborne trade” amounting to some 400mt of coal annually mined in the north of the country but shipped to ports in the south.

He believed there was considerable potential for foreign coal exporters to generate extra business out of that Chinese domestic seaborne trade which already was equal in size to the total annual seaborne coal trade into the Pacific basin.

Houston added the outlook for coal demand from India was strong as the country was building a number of power stations along its coasts which would be supplied through imports. Houston said local coal production in India was generally low quality containing up to 50% ash.

At the same time coal exports from Indonesia – which is the major Asian coal exporting country – were slowing down because of rising constraints on production and rising domestic demand to use the coal for power generation.

Goedgevonden is a joint venture between Xstrata and ARMCoal which has cost R3.5bn to complete and will produce 6.8mt/year of saleable coal at full output. Some 3.2mt of that coal is planned to be exported in terms of the Phase Five expansion of the Richards Bay Coal Terminal.

Goedgevonden will be a low cost, open cast operation and is viewed as the “template” for two more major projects that Xstrata is undertaking in the Witbank region which are the Atcom consolidation programme and the Tweefontein complex which should be completed by 2013.

Strategy is to increase the proportion of Xstrata Coal’s production in South Africa sourced from low-cost opencast mining from the current level of 37% to 56% by 2012.

However, Xstrata executives would not provide an estimate on the group’s total SA coal production for 2012 saying this would be linked to the available railage capacity.

That results from the constraints placed on the ability of the South African producers to export coal through the Richards Bay Coal Terminal (RBCT) by the current and planned capacity of Transnet Freight Rail (TFR) to move the coal.

The RBCT will shortly have the capacity to handle 91mt/year but TFR’s current capital budget only provides for its coal railage capacity to reach 75mt/year by 2013.

The result has been a dispute since January between the current RBCT members and the Phase Five newcomers over how the available coal should be allocated between them.

Xstrata Coal sits on both sides of that fence because it is one of the three existing major shareholders in the RBCT with a 20% stake.

Houston declined to get into specifics of the dispute and commented only that, “there is a process going on at the moment and I cannot talk about the details.”

Asked whether Xstrata was concerned about its position and that of partner ARMCoal given the investment in Goedgevonden Houston replied, “we are concerned but we will manage Goedgevonden as part of our overall business.”

Houston was optimistic that TFR would be able to exceed its 75mt/year forecast. He pointed to recent major improvements in the operating efficiency of the line made by TFR’s new management approach.

He also pointed out a major stumbling block to faster investment by TFR was the unresolved issue of replacing the old long-term railage contracts.

The coal exporters have been operating on a short-term, “bridging” tariff arrangement for the past three years while negotiations have been underway with TFR which wants the coal exporters to commit to long-term “take or pay” contracts similar to those it has in place with the iron ore exporters.