By Keith Norbury

Most coal exported from Canada is shipped across the ocean on long-term contracts, says a Canadian transportation executive knowledgeable about the coal industry who did not wish to be identified. That’s especially true of metallurgical coal, which makes up the bulk of Canadian exports, he noted.

Prices for a commodity such as coal are usually based on the dominant trade route. For metallurgical coal that would be coal shipped from Newcastle (Australia) to China or Japan. Prices for other routes are based on the dominant route, and adjusted for the length of the voyage. For example, from the Westshore Coal terminal at Roberts Bank near Vancouver to Qingdao is only slightly longer than from Newcastle, Australia to Qingdao. Prince Rupert’s Ridley terminal is only 4,664 nautical miles to Qindao, less than the other two routes.

“Freight is essentially a time and distance calculation,” the transportation executive said. “The closer you are the cheaper the freight should be … it’s not a very complicated pricing exercise.” Major factors affecting the price of coal transportation by ocean include the cost of chartering the vessel, the price of fuel, and the crewing and trades costs. The latter include ports costs and the cost of going through the Panama canal or Suez canal if applicable.

Normally, the cost of chartering the vessel represents about half the total ocean freight cost. However, charter rates have recently been in a slump caused by too many ships competing for a finite amount of cargo. Capesize rates were $6,802 a day in mid-February, Reuters news agency reported. Such rates don’t even cover a vessels operating and financial costs, and are a fraction of the $200,000 or more of the daily rates that spiked in 2008. The transportation expert expects those rates have nowhere to go but up, probably within a year or so. “Those numbers for the freight are unsustainable. You can’t make money running ships at that level.”

One way to mitigate the risk of price hikes is to invest in freight futures, paper transactions in which future freight is bought at a price negotiated today, plus a premium. It mitigates against a price spike. But should prices collapse, the buyer is locked into a price that is in excess of spot prices.

If freight costs are not governed by long-term contracts, or a futures contract, or are not subject to adjustment under a long-term contract, they are negotiated as a “spot price” for a transportation contract that needs to be executed immediately. The transportation executive revealed that in mid February the Capesize spot rate for coal from Roberts Bank to Qingdao was $10.80 a tonne. That’s close to the $10.75 a tonne that Simpson Spence and Young, shipbrokers, reported Feb. 13 for a 120,000 tonne Capesize vessel taking coal from Newcastle to Korea, a similar distance as Vancouver to China.

Should a long-term coal shipping contract contain price adjustments, then things get more complicated. “I don’t know if there’s any typical price adjustment,” the transportation executive said. Adjustments in contract prices for ocean transportation of coal are normally based on an index. It could be a general transportation index, such as the Baltic Dry Index. Or it could be one of several indices specific to coal.

Platts, a subsidiary of McGraw-Hill ( and Argus/McCloskey ( are service providers that report on international developments with respect to coal prices and the cost of transporting coal, and can be purchased on an annual subscription basis. Simpson Spence and Young, an independent shipbrokering group (www.ssyonline) also provides freight rate intelligence, some free, more on a subscription basis.

In many cases, such as for a utility that requires a certain level of supply of thermal coal, a contract will specify volumes over a long term, but allow annual negotiations on price. And those price negotiations would be based on an index, which is a benchmark. International coal traders deal with coal commodity indexes, which are a function of supply and demand in the international market, and are not a function of cost.

“However, metallurgical coal isn’t priced in the same way at all,” the transportation executive said. “Metallurgical coal is priced on an annual negotiation basis.” Those negotiations are now often directly between the mining companies and the customers, such as steel mills. There used to several large commodity trading companies that dealt with coal and other commodities. A few remain, such as Glencore International. And trading houses in China and Japan also still represent groups of smaller steel mills. Metallurgical coal isn’t subject to the same market forces as steam coal. The latter is more susceptible to price fluctuations because it is fairly easy for a utility to swap coal supplies from one part of the world for another.

Metallurgical coal, however, has unique properties depending on where it is mined. Steel mills will buy metallurgical coal, each with different properties, from sources in various countries and then blend them to produce specific types of coke suited to the mills’ particular steel-making requirements. For that reason, metallurgical coal prices do not lend themselves to being indexed. “So from a security of supply point of view, both parties will realize that they are going to be in business for a long time, and are willing to negotiate long-term pricing and supplies,” the transportation executive said.

Shipments not governed by long-term contracts could be priced on shipment-by-shipment negotiations based on the spot prices. But it involves a lot of work to constantly monitor the ups and downs of the freight market. Not many people have the desire to do that. An annual agreement is much simpler, especially when it comes to budgeting.

Canadian coal is typically sold on the basis of FOB export port. The buyer then takes care of all ocean shipping costs. Alternatively, sales can be made on a CIF (cost, insurance, freight) or CFR (cost and freight) basis. The transportation executive noted that allowing the buyer to control the delivery system isn’t the best arrangement for an exporter, he said. But that’s the way it has been done traditionally because buyers have the power. “The steel mills in Japan have always done that and the Chinese are doing the same thing.”

In any case, on a per-mile basis, the price of ocean freight is only a fraction of the cost of overland rail freight required to transport the coal to the Port terminal. “Ocean freight is the best bargain in the world,” the transportation executive said. “Even in a robust freight market.”