REUTERS
Posted: Thursday, Jun 28, 2012
Launceston: At first glance the Australian government's forecast for an increase in both coal export volumes and value in the year starting July 1 seems a touch optimistic.
If anything, current market signals point to a coal market awash with excess supply, which has been driving down prices, and most participants expect further declines, at least in the short term.
The Bureau of Resource and Energy Economics said on Wednesday it expected Australia's thermal coal exports to rise 12.6 percent to 179 million tons in the 2012-13 financial year, with the value gaining 6.9 percent to A$18.6 billion ($18.6 billion).
Assuming the volume forecast is on the money, the value forecast assumes a price of A$103.90 a ton, which is about the same in U.S. dollars, as the two currencies are at parity.
The current price for spot cargoes from Newcastle, Australia's largest thermal coal export port, is $84.45 a ton, which is 19 percent below the bureau's average price for 2012-13.
Given that the start of the new financial year is less than a week away, is it realistic to expect that prices will climb by as much as the bureau expects?
Certainly not in the next few months, but if Asian economies, particularly those of major thermal coal consumers India and China, start to accelerate again by the fourth quarter, it's possible prices may well accelerate as well.
The bureau expects Indian imports to rise by 17 percent to 104 million tons in 2013, while China's will gain 6 million tons to 151 million tons.
The notes of caution are that India's importers are battling a weak rupee that has largely outweighed the benefit of slumping dollar coal prices, while China's recent pattern shows imports are only viable when they are competitive with domestic output.
While Newcastle coal has slumped 30 percent from its peak this year of $122.16 a ton, reached on Jan. 27, in rupee terms it is down only 14 percent.
The depreciating rupee, coupled with slower economic growth in India, has constrained Indian demand for imports.
It's also worth noting that while India undoubtedly has demand for imported coal, it lacks enough infrastructure needed to move the fuel and the regulated electricity pricing also often makes burning imported coal uncompetitive.
In China, imports have consistently surprised to the upside this year, defying a slackening pace of growth in power generation as industrial output comes off the boil.
Imports of both thermal and coking coal in the first five months totalled 90.89 million tons, a jump of almost 68 percent on the same period in 2011.
Given that coking coal imports gained by just 34 percent, the increase was concentrated in the different grades of thermal coal, with bituminous imports three times higher.
However, it's hard to see where ongoing coal demand will come from, unless China's industrial output starts to trend higher again, which is likely once the government stimulus and monetary loosening kick in later this year.
Traders report cargoes for China being deferred and swollen inventories at ports and power plants, which point to slower imports in the next few months.
But imports into China can be supported by lower prices, with the current Newcastle price plus the 17 percent import tax coming to $98.80, while the domestic price is about $110.
With shipping and insurance costs from Australia said to be around $10 to $15 a ton now, and less from Indonesia, imports are competitive, especially when the costs of internal transport in China are factored in.
However, they are only just competitive and certainly won't be if prices rise to the near $104 a ton average level the Australian government forecasts for the next 12 months.
It seems that coal in Asia may be caught between a volume and a price story, with demand insufficiently strong to warrant both rising prices and volumes, but strong enough for higher volumes at lower prices.
If low prices endure for several months, there is likely to be a supply response, with some Australian mines already at the marginal cost of production, as are many smaller operations in Indonesia.
The push of U.S. coal into Europe, which has sent more South African cargoes east, may also ease in coming months, with several U.S. producers cutting output and workers.
Alpha Natural Resources fired 150 workers and cut output at four mines, while Arch Coal is reducing its workforce by 10 percent and idling three mines.
Whether this will be enough to tighten supply sufficiently and raise prices in Asia remains to be seen, especially in the absence of strong demand growth.
For now, it seems that the Bureau of Resource and Energy Economics is taking an optimistic view of coal pricing in the next 12 months, even if the demand figures can be achieved.
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