By Joseph Clarke and Maurice Geller

May 23, 2018 - Uncertainty continued to cloud the South African coal market Tuesday as reports of national utility Eskom needing to purchase material typically dedicated to the export market, coupled with supply tightness and a strongly bid index, had sources uneasy on the sustainability of current high price levels.

Platts FOB Richards Bay 5,500 kcal/kg NAR 7-45 day price had been on a strong run since the end of March, recently peaking at $89.60/mt on Thursday, from $76.10/mt at the end of March.

The record price levels had met with consumer resistance in the country's key export market of South Asia.

"There is almost no physical demand," a South African trader said. "All the tons we have leaving [Richards Bay Coal Terminal] are on term contracts -- there is no spot demand," the source added.

The trader said the high prices had created favorable arbitrages into South Asian markets for nearly every other origin of coal, with the US, Australia, and Indonesia being the main competitors.

"These prices are phenomenal, no one is buying spot at these levels," a consumer in Asia said.

The source had ruled out South African coal for their last three spot purchases, saying Russian, US, and Colombian were all cheaper alternatives for high CV coal, quoting a recent offer for 6,000 kcal/kg NAR South African coal at $122/mt FOB on Monday.

Lower grades of South African coal -- the more widely consumed by South Asian utilities -- are priced on a discount basis from the 6,000 kcal/kg NAR grade, and sources said the underlying supply tightness was preventing the discounts from widening too far.

The initial price rises were caused by lower Q1 production from rainfall at several of the country's large open pit mines, and blending other grades to account for this shortfall had extended the supply tightness to other coals.

Further supporting prices were reports circulating in early May that Eskom was facing domestic supply shortages -- usually of lower heating values than export-grade coal -- and was looking to purchase anywhere between 3 million to 11 million mt of coal.

Sources questioned Eskom's ability to purchase additional tons as any purchase would need approval from the South African Treasury, which would likely resist current market prices.

"It's easy to say you will buy more coal from the spot market, but the grades [Eskom] want simply don't exist right now," a consultant in South Africa said.

"The only way for Eskom to meet their demand is to meet the market price, but export coal, domestic coal, is all too expensive," the source added.

Eskom's typical purchase price for domestic coal is understood by S&P Global Platts to be around $16/mt, while Platts most recent assessment for 5,500 kcal/kg NAR coal was $88.30/mt on Monday.

Eskom has declined to comment when contacted by Platts on the matter.