coal & coal markets

Comment on Coking Coal vs Thermal Coal
While coking (metallurgical) coal and steam (thermal) coal have similar geologic origins, their commercial markets and industrial uses are vastly different. Homeland Energy has two thermal coal operations in South Africa; a producing mine, Kendal, in Witbank and the Eloff Mining Project located east of Johannesburg.

Both Kendal and Eloff coal qualities are mainly used for power generation as well as some industrial operations to generate steam. Homeland does not produce any coking coal at present, which is predominantly used by the steel and other metallurgical industries.

Information for the following table was provided by Homeland's Coal Marketing Manager, Miri Zlatnar. Miri has more than 20 years experience in the coal industry as energy journalist and as a physical coal buyer and seller in the international market.

The table below is a rough guide to the differences between the two qualities of coal and serves to explain why the decreased demand for Coking coal has not affected the demand for Thermal coal.

 

Thermal Coal

Coking Coal

Major Producers

China, Australia, South Africa, Colombia, Russia, United States, Indonesia

Australia, Canada, United States

Major Exporters

Australia, South Africa, Colombia, Russia, United States, Indonesia

Australia, Canada, United States

Primary Use*

Burned for steam to run turbines to generate electricity either to public electricity grids or directly by industry consuming electrical power (such as chemical industries, paper manufacturers, cement industry and brickworks). During power generation the coal is ground to a powder and fired into a boiler to produce steam to drive turbines to produce electricity.

Used to make metallurgical coke which is used as a reducing agent in a blast furnace to temper iron ore into steel products.

Markets

Thermal coal demand rose dramatically during 2007 and 2008, primarily due to the increasing demand for power generation in the Far East. Prices also hit historic highs in mid-2008 of around US$200 and have dropped to around the $70 level.

Even though the demand and price hikes were largely driven by Chinese demand, there was also a lot of sentiment distorting the true demand/supply picture for thermal coal.

The actual demand/supply balance of steam coal and power generation did not, and still does not experience such wild swings.

That is why the industry agrees that, even though the global financial crisis has had an impact on power generation forecasts, electricity production from coal is continuing at much the same pace as before and the current high $60s/low $70s price levels have remained steady throughout Q3 2009. However, forecasts indicate these levels will stabilise around the S$90/$110 mark during 2010 and beyond; these levels, the industry believes, realistically reflect the future supply/demand scenario. Energy experts believe that thermal coal prices are unlikely to fall below these levels in the longer-term.

Coking coal demand and prices reached record price levels during 2008 mainly because of China's dramatic increase in production of steel in recent years and demand for coking coal. Indian steel mills were also driving the demand for coking coal, but not on the scale of the Chinese.

Coking coal prices hit around US$360/$380 per metric tonne in mid-2008 from around $140/$160 per metric tonne in the previous 3/4 years. This demand and price collapse is largely due to the steel industry being hit hard as the surging demand from China and other countries drops off, coupled with the soaring prices for materials used in steel making.

The credit crisis and global economic slowdown have undercut customers in key markets - construction, automobiles and industrial equipment - sending prices tumbling and prompting steel companies to slash production, scale back shipment forecasts, delay expansion and cut back the workforce.

Consequently, prices returned to the US$120/$140 pmt levels during 2009.

Demand

Forecast to increase at a steady pace throughout 2009 and increase from 2010 through to 2013 and beyond.

Dramatically decreasing with decreased demand for steel.

Outlook

So the fall of coking coal prices has not had an impact on thermal coal prices. The medium to long-term stability of thermal coal demand and prices is expected to continue. Coking coal demand, on the other hand, is expected to remain low, keeping prices depressed until 2011, according to some analysts.

* There are different grades of both steam and coking coals, depending on the age of the coals.
The most common on the traded market are the inferior steam coals, or sub-bituminous coals which are also used in some power plants or blended with the superior variety or bituminous coals.
Likewise, there are the semi-coking coals, which are a poorer quality to the hard coking coals and are therefore blended with coking coal for the manufacture of coke.

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