Asia coal price unlikely to get winter boost

LAUNCESTON, Australia: The recovery in the price of spot coal at Australia’s Newcastle port since June’s 30-month low appears to have stalled, and it’s unlikely to get the traditional seasonal winter bounce.
The Asian benchmark slipped back below $ 90 a ton in the week ended Sept. 21, its first close below that level since Aug. 3.
It seems that for now Newcastle prices are going to struggle to make headway above $ 90 a ton as Chinese imports slow as domestic prices in the world’s largest consumer ease.
Not even cuts in supply from Indonesia and Australia, the world’s two largest exporters of thermal coal used in power plants, is likely to be enough to boost prices.
Not only have Chinese domestic prices dropped, power plants appear to have ample stocks and electricity generation from coal has barely been growing so far this year.
Looking at China’s imports first, and it appears the long-anticipated slowdown in growth finally appeared in August.
Inbound shipments totaled 17.28 million tons, up 4.9 percent from the same month last year but down 14.5 percent from July’s figure.
The year-to-date growth was a still impressive 44.3 percent, but this slipped from the 51.2 percent recorded in July.
Much of the gain in imports so far this year can be explained by the fall in Asian prices, which boosted the competitiveness of Australian, Indonesian, US and South African suppliers.
However, Chinese domestic prices have also fallen, narrowing the gap to imports.
Prices for coal at Qinhuangdao, the main Chinese benchmark, have eased from $ 145 a ton at the end of April to $ 116 a ton.
The gap between the Qinhuangdao and Newcastle prices was almost $ 45 a ton at the end of April, but that dropped to about $ 23 by August and currently sits at $ 26.27.
Given that coal imports face a 17 percent tax and shipping costs can add about $ 15 a ton, it’s clear that the advantage for Chinese power plants in buying from overseas has eroded in recent months.
Add to this reports that Chinese coal traders are battling to obtain financing as they struggle to offload cargoes bought at higher-than-current prices earlier in the year, and it seems there are enough reasons to be negative for Chinese coal imports over the northern winter.
Another factor is demand, with power generation data showing that even the modest 2.7 percent gain in China’s monthly output was achieved by large jumps in hydro and wind power, at the expense of coal-fired output.
Thermal generation, which includes coal and oil, fell 6.3 percent in August from a year earlier, and is only up 0.7 percent in year-to-date terms.
In contrast hydro power jumped 48 percent in August to be up 20.6 percent year-to-date, while wind gained 46.3 percent last month for a 13.8 percent gain in the first eight months of 2012.
While the chances are that hydro generation will ease in coming months because of seasonal factors, it will take fairly strong growth in coal-fired power to boost demand significantly. Power generation demand will rise for winter, and may be further boosted if the government’s efforts to stimulate the economy start to bear fruit by later in the fourth quarter or by early in 2013.
But for now it appears that there is plentiful coal supply, and output cuts in Indonesia and Australia are more likely to put a floor on the coal price rather than act to boost it.
Indonesia now expects to produce about 340-350 million tons of the fuel this year, down from an earlier forecast of 390-400 million tons.
Given Indonesia’s domestic economy is still fairly robust, it’s likely that much of the drop of 50 million tons in forecast production will be felt in the export markets.
Australian miners have also been paring back on output, with some coal operations shedding jobs as they battle low prices and a high local dollar that boosts costs and lowers revenue.
Newcastle coal gained 42 percent from the beginning of October 2009 to the seasonal peak in January 2010, and 43 percent over the same period a year later.
This was followed a by a lesser bounce of 10.7 percent over last winter, but even this magnitude of gain may be out of reach this year.

— Clyde Russell is a Reuters market analyst. The views expressed are his own.