Coal prices in Asia are poised to stall after the biggest quarterly gain in two years as demand from China fails to absorb increased exports from Australia, Colombia and Indonesia.
Thermal coal at the Australian port of Newcastle, the benchmark grade for the region, has risen 9 percent to average $91.62 a metric ton in the period ended March 22, heading for the biggest jump since the first quarter of 2011, when flooding cut output from Australia, according to data from IHS McCloskey. Prices will average about $95 this quarter, according to a survey of eight analysts at banks including Barclays Plc and Deutsche Bank AG.
Rising hydro power output and swelling coal stockpiles are eroding China’s import needs, threatening returns for producers such as Rio Tinto Group (RIO) and Xstrata Plc (XTA) that are seeking to curb costs to offset falling prices. At the same time, output is increasing from Colombia and Indonesia, the world’s biggest exporter, according to a report last month from Australia’s Bureau of Resources and Energy Economics.
“There isn’t a number two option after China,” said Michael Parker, an analyst at Sanford C. Bernstein & Co. in Hong Kong. “You’re going to see a decrease in thermal-coal imports into China this year because we have a situation where coal prices are now falling at a time of year when they should be going up.”
Coal at Newcastle has climbed 13 percent since Oct. 19, when it reached a three-year low of $78.05 a ton, according to IHS McCloskey, a Petersfield, England-based data provider. The fuel fell $1.25 to $87.90 in the seven days ended March 22. Prices surged 19 percent to average $128.20 in the first quarter of 2011 after rain swamped mines and rail lines in Australia, the world’s second-biggest exporter. They will average $95 this year according to the median estimate in the Bloomberg survey of analyst forecasts this year.
Power-station coal with a heating value of 5,500 kilocalories a kilogram at Qinhuangdao, China’s biggest port for the fuel, has dropped 4 percent since mid-October and averaged 615 yuan ($99) a ton as of March 31, according to the China Coal Transport and Distribution Association in Beijing.
Stockpiles at Qinhuangdao climbed to 8.3 million tons as of March 24, the highest level in 32 weeks, according to the association. They slid to 7.4 million tons as of March 31.
“The market is well-supplied in China,” Andrew Driscoll, the head of resources research at CLSA Ltd. in Hong Kong, said in an e-mail. “We forecast thermal coal imports down a little this year to 160 million tons.”
Coal purchases in China, the world’s biggest consumer, rose to a record in December as buyers stocked up before mines closed for the Lunar New Year holiday that ended in February. The country imported 23.3 million tons that month, down from 30.6 million in January and 35.1 million in December, data from the Beijing-based General Administration of Customs show.
The nation’s imports might not be enough to absorb the excess supply this year, Deutsche Bank said in a March 25 note. The bank reduced its 2013 estimate for Newcastle coal by 3 percent to $92 a ton.
Increased hydro generation in China has reduced demand for coal, Helen Lau, a Hong Kong-based analyst at UOB-Kay Hian Ltd. who predicts Newcastle coal may average $97 a ton this year, said in an e-mail. Coal stockpiles have risen while power generation failed to see a “significant” increase in the first quarter, she said.
Power generation from China’s hydro plants increased 24 percent to 82 billion kilowatt-hours in the first two months, data from the China Electricity Council showed March 18. Thermal power gained 1 percent to 643 billion kilowatt-hours.
China’s electricity consumption still had the weakest start to a year since at least 2010 as industrial output slowed. Power demand in January and February rose 5.5 percent from the same period in 2012 to 789.2 billion kilowatt-hours, the National Energy Administration said March 14. That’s the slowest pace in NEA data going back to 2011. Growth was 6.7 percent in the first two months of last year and 12.3 percent in 2011.
Australia’s coal exports are projected to rise 11 percent this year to 189 million tons, the nation’s Bureau of Resources and Energy Economics said. Indonesia may increase shipments by 6 percent to 335 million tons, while volumes from Colombia are forecast to climb to 79 million tons, the forecaster said.
Strikes at the Cerrejon mine in north Colombia and a suspension of operations that lasted one month at Drummond Co.’s port near Santa Marta in February may still limit export growth this year, the bureau said. Cerrejon, whose owners include BHP Billiton Ltd. (BHP), Xstrata and Anglo American Plc (AAL), has also been hurt by sabotage at the mine and railway links.
“With Australia, Colombia and Indonesia all ramping up exports, the recent recovery in China’s imports of thermal coal might not suffice to absorb all the oversupply this year,” Merrill Lynch analysts including Sydney-based Peter O’Connor said in a March 25 note. “Low prices might be necessary for longer to force production cuts and project reviews.”
Xstrata last month said it would consolidate its Australian coal operations, while Rio Tinto said it was taking steps to reduce costs in an industry facing a challenge to remain globally competitive. Whitehaven Coal Ltd. (WHC) cut workers because of continued weakness in prices, an unfavorable foreign exchange rate and increasing pressure on operating margins.
Even rising demand in India won’t be enough to soak up additional supply as the nation’s imports, transportation and generation capacity remains constrained, according to Parker.
“You often get conversations about India, but when you look at port capacity, power generation and transportation capacity domestically, it’s really difficult to get more than an incremental 20 to 30 million tons a year into the country from a seaborne perspective,” he said.
India’s thermal-coal imports may rise to 110 million tons this year if prices stay at the current level, Amulya Charan, chief mentor for power trading and advocacy for Tata Power, said in a conference presentation in Singapore Feb. 20. The nation purchased 101 million tons last year, Australia’s Bureau of Resources and Energy Economics said in a report last month.
Japan, which imports most of Australia’s thermal coal, may negotiate the lowest contract price for the fuel in three years in talks with Xstrata, according to a Bloomberg survey.
Newcastle coal may trade within a range of $85 a ton and $95 a ton from 2013 to 2014 as exporters compete with domestic output in China, Macquarie Group Ltd. analysts including Colin Hamilton in London said in a March 27 note. The fuel may trade toward the bottom end of the range in the near term, they said.
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