Chinese domestic thermal coal market to remain challenging in Q3: Nomura

Singapore (Platts)--2Jul2012
China's domestic thermal coal market will remain challenging in the third quarter of this year due to lower power demand growth and higher hydro power utilization, according to Japanese brokerage Nomura.

It also sees more non-coal-fired power alternatives like hydro, wind and nuclear projects being commissioned in the second half of the year in China.

"Rising cheap seaborne coal imports will likely drag down domestic prices and narrow the price gap, and power shortages during summer are not likely to be as severe as we had expected earlier," analyst Ivan Lee said in a research note dated June 29.

US coal exports jumped 31% to 107 million mt in 2011 compared to the previous year, with 39% of new supplies shipped to Korea, Japan, India and China, the analyst noted, adding that US coal represented 6% of the Asia-Pacific seaborne market.

At a time when European demand is weak, increased US availability of coal due to the glut of cheap shale gas there has seen more coal be diverted to Asia, creating a surplus in the Asia-Pacific region as China's power generation slows, the analyst said.

"Therefore, a rebound in coal prices, driven by supply response, could be subdued if coal-to-gas substitution continues and more coal from the US goes to the Asia-Pacific region," Lee said.

In China, the Qinhuangdao thermal coal spot price had fallen 7.2% week-on-week to 680 Yuan/mt as of June 25, the biggest one-week fall over the past three years, the analyst noted, adding that the Bohai-Rim Steam Coal Index had fallen 3.7% week-on-week to 702 Yuan/mt as of June 27.

In Guangzhou port, coal sourced from Qinhuangdao was at a 10.3% premium to that sourced from Newcastle, Australia, the analyst said.

A further increase in Chinese imports of seaborne coal could likely be triggered by the cheap international coal prices, which are still trading at a 10% discount to Chinese domestic market, the analyst said.

"We see limited downside risk for seaborne coal prices but a potential 10-15% downside for Chinese prices," the analyst said, adding that Chinese spot coal prices could bottom in the third quarter of this year and remain low for the rest of the year.

--Deepak Kannan,
--Edited by Alisdair Bowles,