Metallurgical Coal Markets

Introduction

In order to gain an understanding of “Metallurgical Coal Markets” it is useful to have

an appreciation of coking coal quality, how coke is produced and why coke quality is
so important in metallurgical processes. I hope to give you a broad technical insight
into metallurgical coal and provide you with enough information to differentiate
between thermal and coking coal and explain why they are valued differently. The
presentation will therefore be divided into technical and commercial sections.

Coking coal is used to produce coke, which is used in a number of metallurgical

processes, however the iron and steel industry is, by far, the predominant consumer of
coke via the iron blast furnace. This presentation will therefore concentrate on the
production of coke for use in the iron blast furnace.

Metallurgical coal includes all types of coking coal, from hard to semi-soft, and PCI
(Pulverised Coal Injection) coals.

Technical Overview of Metallurgical Coal

1. What is Coking Coal and Coke?

There are a number of definitions for coking coal including:

· Coal with suitable properties for carbonisation to produce coke

for use in the metallurgical industry, primarily, iron blast
furnaces.

· Coal that, during slow heating, softens, cakes or agglomerates,

then swells and resolidifies with shrinkage, over certain
temperature intervals.

· Bituminous coal that exhibits plasticity (softens) on slow

heating

There are a wide variety of coal types ranging from lignite to anthracite (Fig.1).
Coals are classified according to their “degree of coalification”, where coalification
is the process of converting living biomass into coal. In other words, coals are
classified according to their maturity or “rank” in terms of general chemical and
physical properties. Lignite is a very low rank coal whereas anthracite is a high
rank coal.

As the rank of the coal, or degree of coalification, increases then the volatile matter
content and moisture content decrease and carbon content increases. The volatile
matter content of a coal is basically the amount of gas, primarily hydrogen and
methane, released during carbonisation. Coking coals are high rank and generally
fall within the bituminous coal category.
Coke (Fig.2) can be defined as:

· the carbonaceous residue left after coal is heated in the

absence of air for a period of time, usually around 18 hours
for blast furnace coke.

2. The Production of Coke

The vast majority of coke is produced in a coke oven battery (Fig.3). A coke
battery consists of a number of individual ovens. In between each oven is a heating
flue where gases are burnt, producing temperatures of about 1250C in the
brickwork, which separates the oven and flue. Heat is then transferred from the
brickwork to the coal in the oven. The coal is coked from the oven wall towards
the centre of the oven. Fig.4 shows a battery under construction. Alternate rows of
rectangular flues and individual ovens can be seen.

On being heated, the coking coal initially shrinks as moisture and volatile matter
are driven off. Once the coal reaches about 400 degrees C it becomes “plastic”,
that is, it softens and the coal particles fuse together. Fig. 5 shows the thin plastic
zone between the coke and coal. At about 500 degrees C the coal resolidifies
leaving a porous mass of “semi-coke”. The semi-coke continues to devolatilise,
fissure and contract as the temperature rises further. The coking process is
complete at about 1000C when all but about 1% of the volatile matter has been
driven off. The phenomena of coking coal softening at a temperature then
resolidifying at a higher temperature differentiates it from non-coking coals.

Fig. 6 shows a partly coked coal charge with a distinct boundary between coke and
coal. During coking the plastic zone moves from the oven walls to the centre of the
coal mass. Fig 7 shows a fully coked oven and the longitudinal fissure at the centre
clearly indicates where the plastic zones meet.

3. Coal Types Suitable for Carbonisation

Coking coals exhibit good coking and caking characteristics. That is, they
agglomerate and swell during carbonisation. The bituminous category can be
divided into three sub-categories, based on the volatile matter content:

Low Volatile (LV) between 14 & 22%

Medium Volatile (MV) between 22 & 29%
High Volatile (HV) greater than 29%

Coals in each of the above categories generally contribute different qualities to the
coal blend. It is very unusual for a single coal to produce coke of adequate
quality for use in a blast furnace. Cokemakers blend a number of coals in order
to produce a coke that the blast furnace operator deems adequate for optimising
blast furnace productivity. The number of coals blended is usually at least three
however it is not uncommon for up to twelve coals to comprise a blend.
 As explained previously, the rank of a coal increases as the volatile matter
decreases. The strength of coke produced from a coal generally increases as the
rank increases. In other words, the more mature the coal, the stronger the coke it
produces. LV coals generally produce strong coke whereas HV coals produce
weaker coke. HV coals generally possess excellent plastic properties that
complement LV coals and, in combination, a very strong coke can be produced.
MV coals usually comprise the highest proportion of the coal blend and possess a
combination of good plastic and strength properties.

4. The Role of Coke in Ironmaking

Coke is charged into a blast furnace with iron ore and it has a threefold role:
· to generate heat
· to generate reducing gas (carbon monoxide)
· to support the ferrous burden

A blast furnace produces two main products, molten iron and slag. Iron is the valued
product and is further refined in a steelmaking shop whereas slag is basically a waste
product (Fig.8). Coke quality, both physical and chemical, has a key function in the
productivity of the blast furnace.

The blast furnace operator will specify minimum coke quality requirements to the
cokemaker. The steelmaker, who further refines the iron into steel, sets very strict
chemistry limits on the quality of iron. If these chemistry limitations are to be met then
the input of “rogue” elements must be minimised by the cokemaker, who is at the
beginning of the ironmaking chain.

The blast furnace operator will set very specific limits on:

Coke Ash
Coke Chemistry – Sulphur / Phosphorus / Alkalis
Coke Strength

a) Ash
The higher the ash content of coke the more slag is produced in the blast furnace.
As slag is a waste product of little value, blast operators aim to reduce the amount
of slag produced. The cokemaker must therefore minimise the ash content in the
coal blend.

b) Sulphur
Sulphur is considered a contaminant in blast furnace iron. Sulphur in coke is
transferred to both the iron and slag therefore the higher the sulphur content of
coke charged into the blast furnace the higher the sulphur content of the iron. The
sulphur content of iron can be reduced in, and subsequent to, the blast furnace
process however it is costly so blast furnace operators aim to minimise sulphur
input.

c) Phosphorus
Phosphorus cannot be removed in the blast furnace process so blast furnace
operators set very stringent limitations on phosphorus content in coke. Phosphorus
 embrittles steel so if its content in blast furnace iron is too high it must be reduced
in the steelmaking process, which is time consuming and expensive.

d) Coke Strength
Coke strength is extremely important because it directly affects the productivity of
the blast furnace. The blast furnace, see Figs. 9 & 10, is basically a counter-current
process with ore, coke and fluxes charged into the top of the furnace and hot air
blown through the bottom. The productivity of a blast furnace is dependent upon
the volume of air that can be blown through the furnace. The more permeable the
layers of coke and ore in the furnace the more air that can be blown through it and
the higher the production of iron. If the coke that is charged into the furnace is
weak it will break down easily and the permeability of the furnace will be reduced
hence less air can be blown through it. The blast furnace operator will therefore set
very strict minimum requirements on coke strength, and the level set will
determine the coal types the cokemaker can use to make up the coal blend.

e) Coke Oven Process Considerations

As well as considering coke quality specifications set by the blast furnace operator, the
cokemaker must also consider his own process when deciding upon the composition of
a coal blend. In the coking process there are two products, coke and gas. Gas is
liberated from the coal during carbonisation and the amount of gas produced is
proportional to the volatile matter content of the coal. The higher the volatile matter
content of the coal blend, the more gas and less coke is produced. In the vast
majority of plants the aim is to maximise coke production hence the volatile
matter content of the coal blend is minimised. The average coal blend volatile
matter content is approximately 23-25%. If the volatile matter content of the coal
blend is too low the coke may not shrink away from the oven walls sufficiently and it
may be very difficult to discharge the coke from the oven. So a balance exists in
considering the correct volatile matter content of the coal blend.

Another important consideration for the coke oven operator is the long-term life of the
coke battery. Cokemakers are aiming for a minimum of forty years life for their
batteries and coal selection is extremely important in ensuring this target is achieved.
Some low volatile coals, particularly from the USA, generate significant pressure
during carbonisation. This pressure is exerted onto the walls of the oven and can, over
time, severely damage them. Tests are conducted to measure the “wall pressure”
generated by these coals and the percentage of these coals in the blend is restricted.
Most Australian LV coals do not exhibit the same characteristics and are often
preferred for this reason.

5. Coal Properties

We have seen how cokemakers must consider coal ash, coal chemistry and volatile
matter content when producing a coal blend. We have also seen why coke strength is
so important. To ensure adequate coke strength the cokemaker must have an
understanding of the caking and coking properties of the coals in the blend.
Caking properties are related to the agglomeration and swelling behaviour of the coal
during carbonisation. Coking properties relate to the behaviour of the coal during
coking and to the properties of the coke produced.

Crucible Swelling Number (CSN)

There are a number of tests that predict the behaviour of coals during carbonisation.
One test determines the ability of a coal to agglomerate and swell. The test determines
the “Crucible Swelling Number” and involves heating a small quantity of coal to
produce a coke button. The button will have a particular profile depending upon the
caking and swelling characteristics of the coal, which is compared against a series of
standard profiles, which are numbered 1 to 9, as shown in Fig.11. Profile 0 is produced
from a coal exhibiting no caking properties and is totally unsuitable for cokemaking.
Profile 1 does cake however doesn’t swell and is not suitable for coking. Profiles 2-3
are weakly caking, 4-6 medium caking and >6 strongly caking. Cokemakers will set a
minimum CSN for the coal blend, generally at least 7.5.

Plasticity

The plastic properties of a coal blend are very important if a strong coke is to be
produced. A plastometer is used to determine the “fluidity” of a coal when it is heated.
It basically measures the viscosity of the coal during its plastic phase. Coal is placed in
a crucible and a metal stirrer is then embedded in the coal. The coal is heated through
its plastic temperature range and the stirrer is rotated at constant torque. The rate of
rotation is measured and the higher the rate the less viscous (more fluid) the coal
in its plastic phase. The more “fluid” the coal in its plastic phase the easier it can
spread through the coal matrix bonding the coal particles together. As an analogy, the
“fluid” coal is the glue that bonds the coal particles together.

US high volatile coals are noted for their high fluidity and are used in coal blends for
this reason. On their own they would produce poor quality coke however in a blend
they enhance coke strength.

Dilatation

The dilatation test provides useful information on the swelling characteristics of a coal.
A pencil shaped sample of compressed fine coal is heated. A piston rests on top of the
coal measuring the initial contraction of the coal, due to the evaporation of moisture
and release of volatile matter, and then the expansion of the coal during carbonisation.
The displacement of the piston is recorded continuously.
The key parameter measured is the Maximum Dilatation, or the maximum expansion of
the coal, and is the percentage of the original sample length. Highly reactive coals may
measure up to 500% whereas non-swelling coals will record values of zero or less.
A brief description of plasticity measures is shown in Fig.12.

6. Coal Blending

Taking all of the aforementioned considerations into account, namely, the blast furnace
operator’s specifications, the coke oven plant specifications and the coal caking
properties, the coke oven operator is now ready to construct a blend that will produce
the specified quality of coke.

As an example, in the ABC Ironmaking Department, the blast furnace operator has
specified

Ash : 8.0 % max

Phosphorus : 0.040 % max
Sulphur : 0.65 % max

He has also specified strict limits on coke strength. The coke maker will therefore aim
for a minimum rank to ensure the strength specifications are met.

The cokemaker needs to maximise coke production, hence minimise the volatile matter
content of the coal blend, although he must ensure there is sufficient shrinkage of the
coke to ensure the coke can be discharged from the oven without “sticking”. He must
also ensure the fluidity of the blend is high enough to facilitate good bonding of the
coal particles and the caking and swelling properties are adequate. The cokemaker
therefore specifies

Volatile Matter : 24 – 25 %
Fluidity : 1000 ddpm
CSN : >8
Dilatation : > 80 %

In the example shown in Fig. 13, the specifications are met by producing a coal blend
where the individual coals contribute to meeting one or more of the quality criteria.
The highlighted figures denote the major contributors in ensuring the specification for
each parameter are met.

Cokemakers will work out a blend then coke a sample in a small pilot oven. The
strength of the coke produced is then determined following prescribed testing
procedures. If the coke does not meet the strength requirements then the blend is
altered and it is re-tested until the coke specifications are met. A summary of critical
coal properties is shown in Fig.14.

7. Pulverised Coal Injection (PCI)

Coal can be injected directly into a blast furnace. By injecting coal the blast furnace
operator is able to reduce the amount of coke required in the process because the
injected coal is effectively replacing a proportion of the coke required to smelt the iron
ore (Fig.15). The injected coal is called PCI coal and it is significantly cheaper than
coke hence the total energy cost to the blast furnace operator is also significantly
reduced.

Coals suitable for PCI can range from LV to HV however they must be relatively low
in ash content and contaminants. As the coal is dried and crushed prior to injection it
must be relatively low in moisture (<10%) and not too hard. If the moisture content is
too high it takes longer to dry and slows down the process. Likewise if the coal is too
hard it takes longer to crush, increases maintenance costs of the crusher and also slows
down the process, which can limit the amount of coal injected.

PCI coals are priced between thermal and coking coal. PCI coals were at one time
exclusively HV coals however, over the last few years, there has been a strong trend
towards LV coals due to the higher Coke Replacement Ratios (CRR) achieved by
these coals. The CRR is the amount of coke replaced by a fixed amount of PCI coal.
After taking into account the amount of coal required to produce coke, about one
tonne of PCI coal can replace 1.3 tonnes of coking coal. As PCI coal is significantly
cheaper than coking coal then the cost savings can be substantial. A number of semi-
anthracite mines in Australia have been very successful in supplying the expanding LV
PCI market.

Global Metallurgical Coal Markets

1. Global Metallurgical Coal Production

Metallurgical coal production is markedly lower than thermal coal on a worldwide

scale, comprising only 15% of the 3.5 billion tonnes of total coal production. As shown
in Fig.16, of the 525 million tonnes of metallurgical coal produced each year, only 195
million tonnes are exported, of which 180 million tonnes is seaborne. Of this, 30
million tonnes is PCI coal and 20 million tonnes is semi-soft coking coal. The
remaining 130 million tonnes is hard coking coal. It is the seaborne trade that I would
like to concentrate on as it has the greatest influence on metallurgical coal prices.

The largest exporting countries of metallurgical coal are:

Australia 107 mtpa

Canada 28 mtpa
USA 20 mtpa

Figs.17-19, indicate the major coking coal areas of Australia, the USA and Canada.
The Australian coking coal mines are concentrated in the Bowen Basin of Queensland
and the Illawarra coalfields in New South Wales. The Canadian mines are located in
British Colombia and Alberta. The US mines are in Alabama and the Appalachian
Basins of West Virginia and Kentucky.

Major importing countries or regions of metallurgical coal are:

Japan 60 mtpa
Western Europe 50 mtpa
Other Asian (primarily India, Korea and Taiwan) 50 mtpa
Other 20 mtpa

2. Major Metallurgical Coal Producers & Consumers

Consolidation of the metallurgical coal industry in recent times has meant that 69% of
metallurgical coal production is in the hands of the top ten producers, compared to
52% in 1995.

As shown in Fig.20, production by the major metallurgical coal exporters is:

BHP-Billiton Mitsubishi Alliance (BMA) 44.5 mtpa

Fording 17.4
MIM 12.8 (incl.-Moura)
Anglo-American 11.5

Regional supply trends for global coking coal are shown in Fig.21. Australia and China
are the only regions in which coking coal production has significantly increased over
the last twenty years. Production in Central/Eastern Europe is consumed almost
exclusively within the producing countries with the exception of Poland and the Czech
Republic, both of whom export to neighbouring countries. Poland is a key coking coal
seaborne exporter however volumes are decreasing as coking coal production declines.
Western European production has declined markedly over the last twenty years and
this trend will continue as German and French mines are progressively closed down.
Metallurgical coal trade flows are shown in Fig.22.

The major steel mills are the largest metallurgical coal consumers however the top ten
steel producers in 2001 only accounted for approximately 25% of global steel
production (Fig.23). This diversification of ownership in the steel industry is now
changing with a number of large mergers in the last few years. The largest steel
company in the world is Arcelor, the product of the merger between Usinor, Arbed and
Aceralia, in February this year. The top seven steel companies in the world by steel
production are:
Arcelor 45.1 Mtpa
Posco 28.6
Nippon Steel 27.1
NKK / National Steel 20.2
LNM Group 19.3
Boasteel 19.1
Corus 17.7

Mergers within the steel industry produce larger companies with enhanced purchasing
power and, as consolidation of the industry continues, then these new merged entities
will use their size to negotiate lower relative raw materials prices in order to give them
a competitive advantage over their rivals. Other large steel companies with a heavy
reliance on imported metallurgical coal include China Steel, Thyssen Krupp Stahl
(TKS), Kawasaki Steel and the Riva Group.

3. Major Influences on Metallurgical Coal Markets / Prices

The major influences on the metallurgical coal market hence prices are listed below.
Supply and demand will, of course, always determine the price for coking coal
however other factors are also taken into account.

a) Steel Production –> Metallurgical Coal Demand

The major influence on metallurgical coal demand is global integrated steel

production. As explained earlier, if steel production is increased then more blast
furnace iron needs to be produced, which in turn means more coke is required. The
correlation between coke production and iron production, in integrated steel
plants, is not however as strong as the relationship between pig iron and steel
production. This is because many integrated steel plants do not produce sufficient
coke to match blast furnace demand. These plants operate their coke batteries
at full capacity and rely on imported coke, primarily from China, to fill the
shortfall. During periods of poor steel demand when iron production is reduced,
steel companies reduce the amount of imported coke and maintain coke production
at full capacity. Consequently, the demand for coking coal remains relatively
unchanged.

Cokemakers only reduce production if absolutely necessary. If production rates are

changed then the operating temperature of the battery also needs to be changed
and continual fluctuations in temperature can reduce the life of the battery
brickwork.

Over the last decade the demand for metallurgical coal has increased from 164 to
180 Mtpa, although this growth has slowed over the last four years (Fig.24).
Virtually all of the growth in metallurgical coal during this period has come from
PCI and semi-soft coking coals (inferior quality coking coals). Japan in particular
has increased its share of semi-soft coking coals at the expense of hard coking
coals. In 1990 Japan imported about 10 Mtpa of semi-soft coking coals. They now
import about 30 Mtpa. The Japanese aim for a higher volatile matter content in
their blends as the coke ovens gas produced in the cokemaking process is valued
highly. As mentioned previously, the higher the volatile matter content of the coal
the more gas is produced in the cokemaking process. In general, the Japanese do
not operate their blast furnaces at the same productivity levels as the Europeans, so
can afford to produce lower strength coke, which enables them to use more semi-
soft coking coals in their blends.

Demand forecasts for metallurgical coal show only very modest growth in the short
to medium term (Fig.25). The PCI market is expected to grow the more strongly
by 10Mtpa to around 40 Mtpa by 2010.

As technology improves, blast furnace operators will achieve higher rates of PCI,
which will increase the demand for PCI coals however decrease the demand for
coke. Consequently the demand for seaborne coking coal is expected to increase
only modestly at 1.5% p.a over the next three years.

Demand for seaborne coking coal will increase in Germany and France over the
next decade as heavily subsidised local mines are closed. Steel mills in Germany
have already increased imports of coking coal due to local mine closures and the
transition to predominantly imported coals will continue.

b) Metallurgical Coal Production -> Supply

As shown in Fig.26, three countries – USA, Canada and Australia, dominate

seaborne coking coal supply. Of recent times, Australian supply, made competitive
by cost reductions and a falling exchange rate, has increased markedly to now
supply over 55% of the coking coal market.

US
US coal companies, once the major suppliers of metallurgical coal, have reduced
exports from over 50 million tonnes to 20 million tonnes over the last twenty years.
US coal exports to Japan have declined from 20 Mt to zero over the same period.
They are now limited to the Atlantic markets. US coals, noted for low ash, low
phosphorus and good caking properties, attract premium prices in the European
market. This is particularly the case for the high volatile coals, which are not
readily available from other parts of the world. The future of US coking coals
mines does not look promising. Little investment in the last decade and depleting
reserves suggests that US metallurgical exports will continue to decline over the
next ten tears.

Canada
In contrast to the US situation, the exports of Canadian metallurgical coal have
increased from 4Mtpa in the 1970’s to over 20 Mtpa in the 1980’s. Canadian
exports replaced a large proportion of US coals previously destined for Japan.
Canadian supply has, however, remained roughly static over the last decade.
During the period of recent low prices, a number of Canadian mines closed,
although with price recovery, the remaining mines have all lifted production.
Canada mainly produces mid and low/mid volatile high strength hard coking coals.
The recent supply problems in the Central and South Appalachia regions of the US,
particularly with low volatile coking coals, has seen increased imports to the US
from Western Canada, which has had the effect of reducing Canadian exports and
lowering seaborne supply. Eastern Canadian steel mills, traditionally heavily reliant
on US coking coals from across the Great Lakes have also begun using western
Canadian coals, further exacerbating the situation. By 2003, the Cardinal River and
Bullmoose mines will close removing a further 4 Mtpa from coking coal exports.

Australia
Australia has a wide variety of coking coals and, now with 107 million tonnes of
production, dominates the lower end of the cost curve. Australia still has very
large reserves of low cost coking coal of all types located reasonably close to the
coast, approximately 0-400 km, compared to Canadian coals that need to be railed
1000-1200km. The rise in Australian metallurgical coal exports has been quite
staggering with exports increasing from 26 Mtpa in the 1970’s to the current level.
As well as increasing exports into the Asian region, notably Japan, South Korea
and Taiwan, Australian producers have made significant inroads into the European
and South American markets. Australia has vast reserves of good quality low and
mid-volatile coking coal. BMA’s reserves alone are sufficient to last decades and
Australian suppliers will continue to dominate the seaborne supply of metallurgical
coal. Rio Tinto are currently developing the 5 Mtpa Hail Creek coking coal mine in
Central Queensland, which will begin production in 2003.

Poland
Polish exports have declined from 10 to 3 Mtpa (land + seaborne) over the last ten
years and it is difficult to see this trend reversing as high cost mines are closed and
a reduction in government subsidies take effect. Polish seaborne exports amount to
1.5 Mtpa, which typically target the South American and European markets.

Overall, with the loss of metallurgical coal production over the last few years from
the US, Canada and Poland, the supply-demand equation has become more
balanced which has arrested the decline in metallurgical coal prices. With
continuing decline in supply from western and central European, Canadian and US
mines, this balanced market is forecast to continue. Future increases in supply will
depend on Australian producers and perhaps the Chinese and Russians.

c) US Thermal Coal Demand

US coking coal producers tend to be swing suppliers, particularly in the high-

volatile category, which can be used for power generation or coke production.
That is, they swing between the domestic thermal coal market and export coking
coal market. For example, in 2000/01, when thermal coal prices rose markedly in
the US, many high-volatile coking coal producers chose to sell their product into
the domestic thermal market rather than the European coking coal market.
Consequently, the price for US high-volatile coking coal rose to very high levels.
Due to the unique plastic properties of US HV coals, alternatives available to
cokemakers are scarce so supply-demand dynamics dictated that prices should rise
significantly.

d) Chinese Coking Coal Exports

China has emerged recently into the coking coal export business and potentially
may be a major supplier to steel mills, particularly in Asia. Over the last two years
China has increased exports from 6 to 11 million tonnes, the majority of which is
semi-soft coking coal. Predicting what may happen to Chinese coking coal exports
 is difficult as it has an expanding steel industry, which is demanding more quantities
of coking coal whilst at the same time many small coal mines are closing due to
safety and environmental issues. This year China imported some coking coal due to
shortages of domestic supply. So, whether China continues to increase its coking
coal exports, maintains current exports or possibly becomes a net importer of
coking coal remains to be seen. Players in the world coking coal market wait in
anticipation to see what eventuates with Chinese exports.

e) Coal Quality

As we have seen, coal is classified into categories based on the volatile matter
content, LV, MV or HV. The price of each grade or coal type will vary depending
on availability and demand. Generally, good quality LV and MV coals will attract a
higher price than HV coal, with the exception of USHV, which attracts a premium.
Coking coals are also categorised (Fig.27), depending on their ability to produce a
hard coke, as either:

Hard Coking Coals (HCC) or

Semi-Soft Coals (SSCC)

Semi soft coking, being inferior in quality, will attract a lower price than hard
coking coals.
PCI coals attract a premium over thermal coal prices.

f) Coal Blends

Many steel mills throughout the world have limited stockyard capacity and are
therefore restricted in the number of coals they can accommodate in their blend.
These mills may request a blend of two or three coals be delivered to their plant.
BMA has the capability at Hay Point (Fig.27) in Queensland to blend coals to meet
the customer’s needs. The cokemaker will specify the types and proportion of each
component coal in the blend. This ability allows BMA to effectively offer a
broader range of coal qualities to customers.

g) Reliability of Supply

Reliability of supply is of paramount importance to cokemakers. They cannot

afford to run out of the major coals in their blend. The ramifications are felt down
the ironmaking production line. Suppliers that demonstrate their commitment to
reliability have a competitive advantage over those suppliers with a poor delivery
performance.

h) Diversity of Supply

Some cokemakers value diversity of supply and will subsidise high cost producers to
ensure they remain in business. On the other hand, producers pursuing a growth
strategy may cut their prices in order to capture greater market share.

4. Potential Threats to Metallurgical Coal

Alternative Ironmaking Processes

A potential threat to coking coal demand is the development of Direct Reduction (DR)
processes that bypass the cokemaking and blast furnace processes. DR processes
produce Direct Reduced Iron (DRI). Coal or natural gas is used as fuel sources
however thermal coal is adequate for this purpose. DR processes are prevalent around
the world however they do not produce iron at the same production rates as blast
furnaces. Blast furnace operators are continually developing new methods to produce
cheaper iron and there is no doubt that blast furnaces will be around for many years.

Electric Arc Furnace (EAF) Steel Production

Electric Arc Furnaces account for 34% of global steel production. Some analysts
suggest this will rise to 40% by 2010. If this proves correct then the growth of steel
production by the integrated mills will be limited, which will also limit coke and
metallurgical coal demand. The major energy source for EAF’s is electricity and
metallurgical coal has no function in the process.

5. Price Trends

As shown in Fig.28, the long-term real price trend for coking coal has declined. Over
the last twenty years production methods have improved and large open cut mines
have been developed. The “Asian Crisis” in the late 1990’s, together with several
major new mine developments in Australia, precipitated a major fall in the price for
metallurgical coal. This period was particularly damaging for US exporters who were
also faced with a strong US dollar.

6. Coking Coal Price Negotiations

Prices are negotiated annually between the major producers and suppliers. Generally
prices are first settled between the major customers (such as Arcelor or Nippon Steel)
and the largest suppliers (such as BMA). The results are confidential between the
parties. These price movements then represent “the market” and are translated to form
a guideline for other negotiations. In the past, Japanese steel Mills negotiated as a
group and the settled prices were published and formed a “benchmark” which was
referred to in other Asian markets. European prices have always been negotiated on
the basis of the supply / demand dynamics in the Atlantic region.

The overriding determinant of the settled price will be the market conditions however
other considerations are also taken into account. These include:

Quality of coal
Quantity of coal purchased
Reliability of supplier
Payment and other terms
Transport costs
Long term or spot contract

7. Long Term Contracts

The major coal producers and steelmakers have long-term contracts in place to
guarantee a secure supply of metallurgical coal. This long-term contract normally
stipulates an indicative tonnage that the buyer can expect year on year. Consequently,
long-term relationships are formed between producers and buyers, which is
advantageous to both parties in ensuring constant, reliable supply of coking coal. As
rationalisation continues in both the steel and metallurgical coal industries then it is in
the best long-term interests of both to ensure the strong alliances are maintained and
enhanced.

8. Logistics

The supply chain from mine to port to customer requires detailed planning. In the
Queensland coalfields all coal exports are transported to port by Queensland Rail
(QR), which is government owned. Coal companies are allocated a tonnage for the
year on a “take or pay” basis and QR are not obligated to transport more than a
company’s allocation. Therefore coal companies must align their production plans and
sales plans before negotiating rail allocations with QR.

Coal is railed from the mine to the port then conveyed shortly thereafter onto a berthed
vessel, as at Hay Point (Fig.29). Detailed planning is essential to ensure coal of the
correct quality is available for shipping. Coal can be either be stored in a stockyard at
the port or blended with other coals to produce a “blend” for particular customers.

9. Shipping

In managing freight, companies will use a combination of Long Term Charter (LTC),
Contract of Affreightment (COA)-short, medium or long term or spot business,
depending on the outlook for the freight market. Due to the obvious cost advantages,
capesize vessels are used where possible, particularly to the larger ports such as
Rotterdam. However a significant proportion of coal is transported in panamax vessels
to ports with draft restrictions. Some companies, such as BMA, prefer to manage the
freight whereas others will ship FOB. Canadian and US producers ship predominantly
FOB. BMA have many customers in Europe whom do not have the stockyard capacity
or requirements for full capesize vessels. BMA provide a“parceling” service for these
customers and may allocate a one or two holds of coal for each customer. Small
customers are therefore able to receive the benefits of the favourable freight rates
negotiated by a larger company with the accompanying purchasing power.

Freight cost comparisons (Fig. 30), show that North American producers have a
significant freight advantage over Australian, Canadian and Chinese producers into the
European market and vice-versa into the Japanese market. Australian producers are
able to compete effectively with US producers in Europe considering the higher prices
required for US coking coals.

10. Conclusion

Metallurgical coals are predominantly used in the iron and steel industry to produce
coke for use in the iron blast furnace. The major producers of seaborne metallurgical
coal are Australian, Canadian and American whilst the major consumers are the Asian
and Western European steel mills. Western world steel production therefore has the
greatest influence on metallurgical coal demand. Supply of seaborne metallurgical coal
production is dominated by Australian producers however Chinese and perhaps
Russian producers may become more dominant forces in the future. Threats to the
metallurgical coal industry include alternative ironmaking processes, of which many are
being developed, however none to date match the production capacity of blast
furnaces.