SINGAPORE, June 2 (Reuters) - --Clyde Russell is a Reuters market analyst. The views expressed are his own.
By Clyde Russell
The price of global seaborne coal is likely to become increasingly tied to what the fuel costs when delivered into southeast China, the heavily-industrialised region that's the world's biggest market for the fuel.
This is because the Chinese have become the marginal buyer of coal, only tending to import when the delivered price in the southeast is at or below what they pay for domestic supplies.
Recent gains in domestic prices in China have been mirrored by Indonesian fuel and for cargoes from Newcastle port in Australia, the world's largest export harbor for thermal coal.
The benchmark domestic spot price for coal at Qinghuangdao port in China rose to $128.37 a metric tonne last week, according to industry data website SXCOAL (www.sxcoal.com), while McCloskey's had the price at $147.39. This represents a gain of at least 14 percent from the second quarter of last year. Newcastle coal jumped to just above $120 a tonne last week, taking the increase from a year earlier to around 20 percent.
While these prices don't take into account the cost of shipping coal from either the north of China or from Australia, traders say the arbitrage window for seaborne imports into China is starting to open. The shortage of coal to generate power in the southeast is also drawing imports, according to traders.
The shift to coal pricing based on China's domestic market underscores the increasing importance of the world's largest commodity consumer, and confirms that to a large extent traditional large buyers such as Japan, South Korea and Taiwan will become price takers.
Producers such as BHP Billiton Ltd. and Xstrata Plc may also find it tougher to impose their will on the market as China becomes the swing buyer and possibly the biggest market for seaborne coal.
This comes just as the producers seem to have ended the system of year-long fixed contracts, replacing them with quarterly based deals that allow them to capture more of the upside from rising prices.
The question then becomes, if the Chinese are price-sensitive buyers and only take imports when they can't get locally, what are the chances of domestic supplies not keeping up with demand?
The view among many producers and analysts seems to be that while China will boost output, it won't be enough to keep pace with demand, especially in the southeast.
BHP believes the seaborne market in southeast China will be the world's biggest by 2020, but that imports will be "opportunistic" depending on price, Alex Green, the resource giant's vice president of energy marketing, told the Coaltrans Asia conference in Bali, Indonesia this week.
China will import about 250 million tonnes of thermal coal a year by 2015, according to Ian Roper, an analyst at CLSA Asia-Pacific Markets. Imports will be needed as China lacks the ability to transport coal from the north and west, where the richest deposits are, to the southeast, he said.
So, if China is going to need imports, but the price it will pay is linked to the domestic price, what's the outlook for domestic prices?
Here the news is uniformly good for coal miners around the world. Cost of production has risen by 30 percent in the last three years, CLSA's Roper said.
This has happened as the government forced the shutdown of small-scale producers, largely on safety grounds. The easy-to-mine reserves are also depleting, leaving higher cost coal that has to be transported further.
Add in a rising yuan against the dollar over time and China's domestic coal price looks to be on an upward trajectory. Much like crude oil, Chinese demand has put a floor on the coal price and a return to levels below $100 a tonne looks unlikely and would require a major global recession.
But the Chinese will most likely still be able to be price setters rather than takers. There is substantial supply projected to come onto the market, with Wood Mackenzie analyst Rudi Vann estimating an additional 214 million tonnes by 2020 from Indonesia alone, with 60 percent of that available for export.
Australia may double its thermal coal exports to about 250 million tonnes by 2015 and as natural gas displaces coal in the U.S. power plants, shipments of coal from the West coast become likely.
This is because the Chinese have become the marginal buyer of coal, only tending to import when the delivered price in the southeast is at or below what they pay for domestic supplies.
Recent gains in domestic prices in China have been mirrored by Indonesian fuel and for cargoes from Newcastle port in Australia, the world's largest export harbor for thermal coal.
The benchmark domestic spot price for coal at Qinghuangdao port in China rose to $128.37 a metric tonne last week, according to industry data website SXCOAL (www.sxcoal.com), while McCloskey's had the price at $147.39. This represents a gain of at least 14 percent from the second quarter of last year. Newcastle coal jumped to just above $120 a tonne last week, taking the increase from a year earlier to around 20 percent.
While these prices don't take into account the cost of shipping coal from either the north of China or from Australia, traders say the arbitrage window for seaborne imports into China is starting to open. The shortage of coal to generate power in the southeast is also drawing imports, according to traders.
The shift to coal pricing based on China's domestic market underscores the increasing importance of the world's largest commodity consumer, and confirms that to a large extent traditional large buyers such as Japan, South Korea and Taiwan will become price takers.
Producers such as BHP Billiton Ltd. and Xstrata Plc may also find it tougher to impose their will on the market as China becomes the swing buyer and possibly the biggest market for seaborne coal.
This comes just as the producers seem to have ended the system of year-long fixed contracts, replacing them with quarterly based deals that allow them to capture more of the upside from rising prices.
The question then becomes, if the Chinese are price-sensitive buyers and only take imports when they can't get locally, what are the chances of domestic supplies not keeping up with demand?
The view among many producers and analysts seems to be that while China will boost output, it won't be enough to keep pace with demand, especially in the southeast.
BHP believes the seaborne market in southeast China will be the world's biggest by 2020, but that imports will be "opportunistic" depending on price, Alex Green, the resource giant's vice president of energy marketing, told the Coaltrans Asia conference in Bali, Indonesia this week.
China will import about 250 million tonnes of thermal coal a year by 2015, according to Ian Roper, an analyst at CLSA Asia-Pacific Markets. Imports will be needed as China lacks the ability to transport coal from the north and west, where the richest deposits are, to the southeast, he said.
So, if China is going to need imports, but the price it will pay is linked to the domestic price, what's the outlook for domestic prices?
Here the news is uniformly good for coal miners around the world. Cost of production has risen by 30 percent in the last three years, CLSA's Roper said.
This has happened as the government forced the shutdown of small-scale producers, largely on safety grounds. The easy-to-mine reserves are also depleting, leaving higher cost coal that has to be transported further.
Add in a rising yuan against the dollar over time and China's domestic coal price looks to be on an upward trajectory. Much like crude oil, Chinese demand has put a floor on the coal price and a return to levels below $100 a tonne looks unlikely and would require a major global recession.
But the Chinese will most likely still be able to be price setters rather than takers. There is substantial supply projected to come onto the market, with Wood Mackenzie analyst Rudi Vann estimating an additional 214 million tonnes by 2020 from Indonesia alone, with 60 percent of that available for export.
Australia may double its thermal coal exports to about 250 million tonnes by 2015 and as natural gas displaces coal in the U.S. power plants, shipments of coal from the West coast become likely.
Throw in supplies from South Africa, Mongolia and Colombia and it appears the Chinese will be able to continue their practice of buying only at the best price. (Editing by Michael Urquhart, sourced Thomson Reuters)
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