Asian coal prices marooned

Wed,20 July 2011, Reuters

SINGAPORE - The price of thermal coal in Asia has flat-lined since February and may drift lower in coming months as Australian supplies increase and China’s import demand is expected to be muted.

Details of BHP Billiton’s production report for the June quarter confirm that thermal coal output is back on track after disruptions from heavy rains and flooding.

BHP , the world’s biggest miner, produced 18.3 million tonnes of thermal coal, up 5.1 percent from the March quarter and almost 13 percent from the year-earlier period.

Along with similar improvements from other coal producers, this serves to confirm that supplies of Australian thermal coal, used to generate electricity, should be back to normal in the second half of 2011.

It’s another story for coking coal, used to make steel, as these mines are concentrated in the parts of Queensland state worst hit by the flooding over the southern summer.

For coking coal, supplies are likely to remain constrained for the rest of the year, and this is being reflected in prices remaining well above $300 a tonne.

But thermal coal is stuck around $120 a tonne, with the Newcastle spot price at $120.40 for the week ended July 18.

It has been in a $5 range either side of $120 since March 14 this year, and the lack of volatility is a sign the market appears to be well-balanced.

However, if Australian thermal coal output is ramping up again, and nothing is really happening to change the demand side, it’s likely that prices will start to head lower, at least in the short term.

China’s coal demand tends to be seasonal with peaks in summer and winter.

Traders say the Chinese have left the spot market for the time being, having secured what they need for the summer, and while June and July imports will look healthy, there should be a few quiet months after that.

However, traders also believe that Chinese buyers will return for winter, and this could drive the Newcastle price up again.

The good news for coal producers is that while the Newcastle price may drift lower in the next three months or so, there is a floor on how low it can go.

This is because the Chinese have shown that when imported coal becomes competitive with domestic supplies for the key southern provinces, they will buy from Australia and Indonesia, as well as South Africa.

That price level is said to be anywhere around $110 a tonne for Newcastle prices, assuming Chinese domestic prices hold around the current $130.

Of course, lower freight rates can change the price levels at which the arbitrage becomes viable, and such a drop has recently made South African supplies competitive with those from Indonesia and Australia.

If the Chinese government also lowers, or scraps, the 17 percent value-added tax on coal imports, that would open the arbitrage window.

Another factor to consider is that the Chinese appear to have rebuilt their stockpiles of coal, with the help of may imports of 13.57 million tonnes.

The May figure was the most since January and some 60 percent higher than the average level of imports for the preceding three months.

China is only likely to be keen to buy from the seaborne market if the price is right, and traders say Chinese buyers have been asking for discounts from the spot prices in order to take cargoes.

Another factor to consider is Japanese demand, which took a hit after the March earthquake and tsunami caused some coal-fired generators to go offline.

The plants are starting to return and Japanese demand for thermal coal should increase in the second half, but will probably still be down in 2011 as a whole.

Coal miners will be hoping for the seasonal uptick in demand in the fourth quarter in order to secure good prices for the additional supply likely to be available as Australian output recovers and far-away producers such as South Africa and Colombia eye the Asian market.

Since these hopes are built on Chinese demand, they may have to accept that prices won’t be rising until China’s domestic price gains enough to re-open the arbitrage window.