SA misses coal boom

London - South Africa's coal exports are surging into 2012 just when top spot buyers China and India are out of the market and supply bottlenecks elsewhere have eased, so it will have to fight for market share, eroding prices in a fundamentally weak landscape.

South Africa has the port capacity to export 81 million tonnes a year of coal from Richards Bay Coal Terminal, but in recent years the tonnage shipped has been far lower at about 64 million tonnes due to rail bottlenecks.

Exports in 2012 are forecast at around 70 million tonnes due to operator Transnet Freight Rail's (TFR's) improved railing rate, exporters and analysts said.

Even if TFR cannot sustain its target 1.6 million tonnes of coal a week moved to Richards Bay, after years of doubt and stinging criticism exporters expect rail rates to rise enough for an extra 7-10 million tonnes of exports.

"I think there's a lot of room for prices to come down - I wouldn't be surprised to see $85.00 a tonne FOB Richards Bay then rebounding back to $105 next year,” said Jaime Correal, analyst at Wood Mackenzie in Annapolis.

Exporters who have enjoyed fat margins on sales at over $100 against cash costs of about $60 are weighing up their likely profits on a higher volume sales at lower prices.

South Africa will export 21 million tonnes of coal in Q4, only slightly less than the 27 million shipped in the first half of the year, following a dramatic performance improvement by rail operator TFR.

Benchmark South African prices FOB Richards Bay have fallen from January’s highs of over $130.00 a tonne to about $100.00, on weakening fundamentals which will bite harder and push prices down in the coming year.

"Isn't it ironic that South Africa gets its act together on railings just as China withdraws from the market?," one major European trader said.

"It's the coal without any visible means of support because it isn't yet pricing in to any market in the world," he said.

This year began with a price spike and supply disruption due to floods in Australia's Queensland state and the Japanese tsunami. Indonesia and Colombia's output was hampered by severe rains and South Africa's exports seemed set for a shockingly low total of under 57 million tonnes.

"Last year almost every exporter had problems - but this year it's the reverse, nobody has a major problem exporting and South Africa is shipping at a totally unexpected rate," one major South African exporter said.

"It's bearish next year and the South African exporters are not in the best position to be trying to increase sales now," said Emmanuel Fages, an analyst with Societe Generale.

But some are unconvinced that TFR can keep up the pace.

"The performance of TFR has really improved lately but it's not clear if it will be sustainable or whether they'll start to have problems again," said Jaime Correal, coal analyst with Wood Mackenzie.

"For this reason and because of strong domestic demand, we expect a slow growth in South African exports to 68 million tonnes maximum next year and slowly beyond that."

Retired drivers save the day

Among numerous TFR initiatives this year, the re-hiring of locomotive drivers had a dramatic impact on productivity, exporter, rail and transport sources said.

"TFR re-employed 26 retired or semi-retired train drivers; their knowledge is very important, they know how to handle a train and can do their own minor repairs," one source said.

These experienced drivers are able to drive new longer trains with many more jumbo wagons over some challenging parts of the line prone to derailments, and can save hours by avoiding the need to send out repair teams.

The move to a scheduled rail service, infra-red inspections of rail track (two potential derailments were averted that way) and raised security to prevent cable theft all played a part.

Rising quantities of American coal bought 1-2 years ago at discount prices are being shipped to Europe, increasing the pressure on South African sellers to shift sales to Asia.

India has been the biggest single buyer of South African coal since 2007, much of it now sold under term contracts but from next year India's biggest trade importers say they will buy spot only and will seek cheaper alternatives where possible.

"There's no doubt that some of the Indian buyers with index-linked term contracts have really suffered and will be more short-term buyers," another major exporter said.

India has been out of the spot market for several months and in the meantime, China absorbed the unwanted tonnes.

China is now the second-largest buyer of South African coal and absorbed about 9.5 million tonnes in January-October, roughly a fifth of the country's exports and a huge increase.

South Korea, which has reverted to buying standard grade coal, is also expected to buy more from South Africa.

"China and India, especially China, are such a huge price influence and the Chinese buyers like South African coal so as long as freight rates remain fairly low, it will still be competitive into China," the second exporter said.