Kepco order comes as relief to coal exporters

KOREA, Sept. 22, 2000 (Financial Times)à‚–The world’s largest importer of steam coal, Korean Electric Power (Kepco), has suddenly issued a tender for 300,000 tonnes following an announcement from one of its Chinese suppliers that it would not be able to deliver its contractual tonnage.

Regardless of the fact that the tonnage is only a fraction of Kepco’s expected coal burn this year of around 34m tonnes, the news will have come as an immense relief for all exporters into the Asian market. China has been exporting an extraordinary volume of coal this year and by the end of July had shipped more than 30m tonnes, 10m tonnes more than in the same period last year.

While the European market has been a strong one for the coal producers, Asia had been kept back from recovery largely by the sheer weight of the Chinese sales. That was until August, when Kepco received some very unwelcome news, with coal producers responding to a massive tender offering coal at prices in excess of its long-term purchase agreements. For the first time in over a decade there was backwardation spot coal was higher than contract tonnage. When this was followed by indications that prices were rising inside China to levels higher than returns from exports, the competition realised that price recovery had eventually arrived.

China’s production is expected to fall to 900m tonnes this year (compared with a peak of 1.37bn tonnes in 1996) due to mine closures combined with a rise in industrial production. While international steam-coal prices have risen this year, their rise has not been as vigorous as oil prices.

In particular, the price of heavy fuel oil, the oil product that competes with coal in the electricity generation market, has traded at prices well over double that for coal on a heat-adjusted basis. Despite the recovery of coal from $30.15 a tonne delivered into north-west European ports at the start of the year to $37.59 today, it is barely one-third of the heavy fuel oil prices. These, when converted to the heat value for traded coal, are at a level just a few cents under $100 a tonne.

The reasons for this discrepancy lie not in any intrinsic value that HFO has over coal (not least, the oil product is much higher in sulphur levels), but in the nature of the coal market. The coal industry has no body like Opec, no futures’ market and is made up hundreds of supply sources throughout the world, none of whose shipments are subject to anything more complex than straightforward market

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