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Coal Prices May Run Out of Steam

Asian Buyers Have Pushed Prices Up Amid Seasonal Stockpiling

Thermal-coal prices may be running out of steam as Asian power producers wind down purchases after a period of prewinter stockpiling and an underlying supply glut reasserts itself.

Prices of the power-generation fuel have rallied to multimonth highs in China and Australia, two countries that dominate coal supply-demand fundamentals, mirroring moves seen with iron ore.

China's continued economic strength has underpinned Australian coal, whose price has climbed to its highest level in more than five months. Chinese coal has also been on streak, rising for eight successive weeks and gaining 12% since early October, although prices are still down 7.2% compared with a year ago.

China's economic growth rate of 7.8% in the July-September quarter may slow due to tightening credit, with some economists tipping it to move toward 7% in 2014, damping industry demand for electricity and the coal used to make it.

Prices at Newcastle port on Australia's east coast, the world's largest coal export facility, have stabilized after rising to their highest level since June. At US$83.40 a metric ton now, the Newcastle spot price is up 6% since mid-October and 10% since an August nadir, but still less than half of levels reached in 2008. The Bohai Rim index, which measures domestic thermal-coal prices in China, hit 594 yuan ($97.50) on Dec. 4 compared with 530 yuan two months ago but still down from 640 yuan a year earlier.

For now, China's power stations are still humming, producing 439 billion kilowatt-hours of electricity in November, up from around 430 billion KWh in October and in September, the China statistics bureau said Tuesday.

Maintenance work on a railway linking mining areas in China's north to a major port at Qinhuangdao added to the recent jump in prices as it coincided with power plants stocking up on the fuel, Barclays analyst Ephrem Ravi said.

Meanwhile, Chinese buyers have been taking advantage of relatively lower prices available from big suppliers in Australia and Indonesia compared with Chinese coal from Inner Mongolia or Shanxi province, said Ralph Leszczynski, head of research at Banchero Costa Group, a shipping services firm based in Italy. Chinese thermal-coal demand rose 8% in the first 10 months of the year, he says.

Imports of the fuel rose 15% from January through November while domestic output eased 0.3%, data from China Customs and the China Coal Transport and Distribution Association respectively show.

Many see prices softening ahead.

"We expect prices to peak at 610-620 yuan a ton at most and to fall when we enter January," said Jin Tao, a Shanghai-based analyst at Guotai Junan Securities.

Rising supplies—with record exports expected out of Indonesia, Australia, and South Africa this year—and moderating demand growth in countries including China and India will cap prices, said RBC Capital Markets analyst Chris Drew, who forecasts an average price of $83 a ton in 2014, down from $85 in 2013. Commonwealth Bank of Australia is predicting $88 a ton for next year.

China's coal output is likely to reach 3.70 billion tons this year, up from 3.66 billion tons last year, according to the China National Coal Association, although plans to rely more on higher-quality coal as part of pollution-control efforts could lead to more imports of that type of the fuel from Australia, thus supporting prices.

The gains are a boon for exporters in Australia, where mining is costly and many operations have been running at a loss over the past year. The coal industry's recent woes have their roots in its earlier success when prices were high and companies rushed to invest billions of dollars in new production and to lock in space at ports.

That new supply is what has been weighing heavily on the market as coal miners elsewhere are vying for Asian customers as they seek to find an outlet for cargoes usually destined for North America, where coal demand has tumbled due to availability of cheap, cleaner-burning natural gas.

In the long term, past investment may pay off. China and India rely on coal for two-thirds, or more, of their generation fuel, and the share of coal in the energy mix in many developing Asian countries, including coal exporters Indonesia and Vietnam, is forecast by the International Energy Agency to rise strongly over the next two decades.

"Exceptional coal cost competitiveness versus other fuel sources combined with continued strong demand from new generating capacity in Asia will drive higher prices in the medium term," Glencore Xstrata GLNCY -0.40% PLC said in a recent presentation to analysts.

It is likely to be a long and bumpy recovery, though.

Source: The Wall Street Journal