To get an idea of just how far coal prices have come in the last twelve months, one need only look at what has happened in South Africa, a key coal exporter to the European market. This time last year coal traders were saying that an effective floor for South African free-on-board coal was $45-48/mt, a level that was recognized as economical for Indian buyers to ship it instead of Indonesian material.
These days, the spot price of South African Free-on-board coal is around $115/mt and the floor price is being talked of in the $90-100/mt range. Add to this spiraling freight costs and European buyers have had to grit their teeth and watch European delivered CIF Amsterdam/Rotterdam/Antwerp spot prices travel northwards from around $70/mt in May 2007 to above $150/mt in today's market.
But while the magnitude of the price increase has been the main talking point, it is perhaps easy to overlook the reasons behind it.
A few European traders confessed to being caught out in the first half of last year, when coal prices first showed signs of embarking on a steep upward trajectory.
At the time, Europe didn't appear to be a region in desperate need of the fossil fuel. Stockpile levels at Amsterdam and Rotterdam were healthy, and the continent had just come out of a very mild winter which had helped to significantly decrease coal burn. Only firm freight costs seemed likely to support coal prices for the remainder of the year.
However, as coal traders quickly found out, Europe has effectively ceased to be a major price driver and as a result they have had to broaden their outlook to a global perspective.
Traders who had once insisted that European coal prices were driven by German power prices, European hydro-levels and stockpiles at the European loading ports, were now looking at the bigger picture. Indian utilities and cement producers began to compete with European buyers for South African coal. Vessel queues off the eastern coast of Australia caused dry bulk freight levels to spike while heavy rains in Indonesia hampered the countrys export performance.
On the demand side, China and India's voracious appetite for coal to fuel their developing economies was instrumental in driving up FOB prices.
All this has also affected the way forward power prices, especially in Germany, are driven. During most of 2007, the main German forward price driver was emissions and traders were talking of a carbon/power correlation.
This link has been shattered by the development of the coal market and its prices. Today the single most important driver for German forward power is coal. As seen in recent days and weeks, oil and emissions prices can drop but German forward power will still rise as long as coal is bullish too.
As German forward power is itself a price driver for derivative power markets in continental Europe, the strange but real effect is that the coal market is now also driving markets where coal does not play a major role in power generation, as the case in the Netherlands and particularly France.
In a nutshell, coal trading has gone global and its market is therefore affecting regional European markets such as power. This means that traders have been faced with a stark choice: ditch the Eurocentric view of the market or risk being left behind.
--Gareth Carpenter Platts International Coal Report and Henning Gloystein Platts European Power Daily
