Coal news and updates

Call for short-term rally in thermal coal prices

The mood at the recent thermal coal confab in Berlin was not as bearish as one might have expected. Macquarie reports there were calls for a rally in short-term prices, as demand is seen improving along with some potential supply disruptions. On the other hand, fears of oversupply meant some think prices may have to go lower in the short run to force out the higher cost suppliers in the US and Indonesia. Macquarie also noted a lot of complaints about onerous take-or-pay agreements in rail and ports in Australia, which has kept the Australian supply in the market. The largest concerns were centred on cost cutting in China and the reduction in infrastructure bottlenecks, which may reduce the need for imports later in the decade.

The US is the swing supplier in the thermal coal market and Macquarie thinks the price at which US material starts re-entering Europe is still around US$85-90/t. Unprofitable US operations were idled rather than shut or still shipped coal to generate cash flow alongside metallurgical operations. Macquarie remains of the view that volume is ready to re-enter the international market when conditions are favourable. Despite this belief, US thermal coal export forecasts have been revised down for next year. The analysts expect exports to be around 4mt lower than 2013, which is forecast to come in at around 40mt, 4mt down on last year.

Macquarie ponders the implication on seaborne market pricing if China removes its coal export tax. The talk is of coal flows from north China being re-directed from the domestic market towards Japan, Korea and Taiwan, if the policy is enacted. Macquarie thinks export demand would only be for higher value Chinese product, thus is unlikely to be stockpiled or surplus material. Overall, Macquarie does not think the removal of the tax will have a major market impact. Feedback from China suggests that producers there are more worried about import competition than trying to export.

Continuing on the thermal coal theme, Macquarie notes Japanese demand has been very strong this year. The analysts believe this strength is unsustainable because of a lack of new capacity. Japan's thermal coal imports through the first eight months of 2013 were up 4% with consumption by utilities particularly strong. The primary reason is that low prices have made coal-fired generation the most attractive option in the absence of nuclear power. Macquarie takes a further look at why imports were up just 4% when consumption was up 14.5%. This is not because of large de-stocking. The answer is that the 10 regional utilities, while accounting for around just 40% of Japan's thermal coal consumption, have more favourable fundamentals than the overall coal demand suggests. Japan's two east coast utilities have led the consumption increase, up 93%, while the largest consumer, J-Power, has actually contracted over the same period.

Source: www.fnarena.com