May 31, 2018 / 12:03 PM / 25 days ago

COLUMN-South Korea's sulphur cap alters Asian coal market dynamics: Russell

(Repeats item issued earlier. The opinions expressed here are those of the author, a columnist for Reuters.)

By Clyde Russell

LAUNCESTON, Australia, May 31 (Reuters) - South Korea’s imposition of a strict sulphur cap on its imported coal is likely to cause ripples across Asia’s markets for the polluting fuel, both in the short and longer terms.

From July, South Korean utilities will be restricted to burning coal with an average sulphur content of 0.4 percent over the course of the year, part of government measures to combat air pollution.

Such a low sulphur limit effectively knocks out much of the thermal coal from Australia, which generally produces coal with a high energy value, but also higher sulphur content than rivals such as Indonesia, Russia and South Africa.

Australia is the second-largest supplier of coal to South Korea, behind Indonesia, and has already been losing market share so far this year.

Vessel-tracking and port data compiled by Thomson Reuters Supply Chain and Commodity Forecasts show a total of 17.4 million tonnes of Australian coal being discharged in South Korea in the first five months of this year, down 7.4 percent from the same period in 2017.

While coal imports from Australia held up well in the first four months, they have fallen sharply in May, to 2.5 million tonnes, according to the data.

This is a drop of 40 percent from May of last year, showing that South Korean utilities are already attempting to source coal from low-sulphur producers.

Customs data for the first four months of 2018 shows that South Korea imported 14.1 million tonnes from Australia, down from 14.3 million for the same period in 2017.

From Indonesia, imports dropped to 11.3 million tonnes from 12.2 million, while those from Russia jumped to 8.2 million from 6.8 million and South African shipments rose to 3.7 million from 3.5 million.

What this suggests is that South Korean utilities are cutting back on high-sulphur imports from Australia, but aren’t switching to Indonesia, rather preferring to buy more from Russia and South Africa.

This means that the utilities are still seeking higher energy coal, but with a lower sulphur content, such as that produced in Russia and South Africa.

Indonesia’s coal tends to be low sulphur, but also of low calorific value, meaning more has to be burned to produce the same amount of energy.

PRICE IMPACT SMALL, SO FAR

The question for the seaborne coal market is how much impact will South Korea’s switch to low-sulphur coal have, given that it is the world’s fourth-largest importer behind China, India and Japan.

In theory, prices for Australian coal should decline, while those for South African and Russian supplies should advance, but the reality may be more nuanced than that.

About 45 million tonnes of Australia’s annual thermal coal exports meet the new South Korean specification, according to consultants Wood Mackenzie.

That’s less than a quarter of the country’s total annual thermal coal exports, but is still sufficiently large to enable South Korean utilities to switch to buying only low-sulphur cargoes.

What this may mean in practical terms is that Australian low-sulphur coal starts to enjoy a rising premium over fuel with a higher sulphur content, even if the calorific values are the same.

This may benefit buyers in countries such as Japan and China, who may be able to buy higher sulphur Australian coal and would be happy to take it at a discount to what they are currently paying.

Chinese utilities are known to buy low-energy, but low-sulphur Indonesian coal for blending with higher energy coal.

The price for South African coal may also move higher, if South Korea starts to boost demand, and there is some evidence in the pricing that this is occurring.

The price of coal at South Africa’s main export port of Richards Bay, as assessed by Argus Media, ended last week at $103.64 a tonne, while the price of similar grade coal at Australia’s Newcastle port was at $105.

This means the Australian coal was at a $1.36 a tonne premium to the South African fuel, which is down from the $8.33 at the end of last year.

There are, of course, other reasons for South African coal to outperform Australian, including rising demand from South Asian countries such as Pakistan.

However, Russian coal in the Pacific market also seems to have outperformed Australian slightly in recent months, with the price at the port of Vostochny in Nakhodka COAL-NAKHOD-RU ending last week at $101, $4 below the Newcastle equivalent, narrowing from the $7 a tonne that prevailed in mid-January.

While the seaborne market is likely to adjust to the new South Korean rules by shifting around who buys what from whom, it’s unlikely that this will signal a dramatic shift in prices.

However, the market should also consider the question as to whether South Korea is the harbinger of more restrictions on sulphur, which would have more serious consequences for Australia, and for the operating costs of Asian utilities. (Editing by Richard Pullin)

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