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The consequences of Japan’s multi-faceted disaster – the earthquake, tsunami and now its nuclear crisis – for the $100bn-a-year seaborne thermal coal market are slowly becoming clear. Even if over the short-term the impact is mixed, beyond a few months it is decidedly bullish.

The combination will be positive for big coal miners such as Xstrata, Bumi of Indonesia, Anglo American and US-based Peabody, and for the biggest traders of the commodity, including Glencore – which handles around 30 per cent of the seaborne coal market – Noble Group of Hong Kong and US-based Cargill.

Over the short-term, prompt demand for seaborne thermal coal has fallen in Japan, as economic activity slows and, therefore, power consumption. Moreover, several thermal power plants have been damaged, so utilities have asked miners to defer cargoes.

With little appetite for the coal elsewhere in the Asian region – the arbitrage opportunity with China is firmly closed as domestic prices there are low – thermal coal prices in the Australian port of Newcastle, a benchmark for the Pacific basin, have remained stable at around $128 a tonne, below the two-year peak of $135 in January.

But demand will rebound as big factories reopen in Japan and the reconstruction starts. With nuclear power severely constrained, coal-fired power plants will be run harder, particularly in the peak months of June-September of electricity consumption. The extra demand could add 500,000 tonnes a month to Japan’s consumption of around 10m tonnes per month in the second half of the year. Some utilities will also need to rebuild stocks, which were washed away by the tsunami.

The negotiations for the 2011-12 annual contracts in Asia, which faced a deadline of April 1, are now postponed. But still, the strength of the market before the quake and the medium-term boost for Japan’s coal needs are likely to see a settlement in excess of the $125-a-tonne record of 2008-09. Indeed, traders tell me that some miners have tabled an initial proposal for $140-$145 a tonne, pointing to a final settlement above $130 a tonne.

The impact of the crisis – both short- and long-term – is been felt more acutely in Europe, where prices are rising rapidly. Japan will not only run its thermal coal-fired power stations harder, but will also buy more liquefied natural gas to produce electricity. LNG cargoes, particularly from Qatar, will move to Japan, rather than heading to Europe, thereby pushing up gas prices in the UK and continental Europe.

The stronger and more sustained increase in gas prices is already making coal more attractive as an option for generating electricity in Europe. This is demonstrated by an increase in what is known as the “dark spread”, the profit margin made from burning coal and selling the resultant electricity, as compared with the equivalent “clean spread” for LNG; as well as by rising demand for coal. Prices are higher in the Atlantic basin and in Rotterdam – the benchmark in Europe – as well as in Richards Bay – the South African yardstick.

The cost of thermal coal in Rotterdam has already risen nearly 11 per cent since the earthquake to $135 a tonne, a two-and-a-half-year high. Besides, Germany’s decision to idle a large chunk of the country’s nuclear power stations for at least three months amid the Japanese nuclear crisis will also increase demand for coal as a replacement.

During the past five years, coal miners saw Europe and Japan as mature markets, with all the growth potential in developing countries such as China and India. If Tokyo and Berlin retreat from nuclear power, Europe and Japan could again be growth markets.
.Copyright The Financial Times Limited 2011