Coal prices to rise on increased Chinese, U.S. demand -Deutsche

Fri Dec 7, 2012 9:04am EST

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By Henning Gloystein

LONDON, Dec 7 (Reuters) - Rising coal prices are restoring profitability to high-cost Australian mines that were making a loss due to an oversupplied global market earlier this year, and prices are set to rise further in 2013, Deutsche Bank said on Friday.

Healthy coal exports from major producers such as Australia, Indonesia, South Africa and Colombia have been met with poor demand in key markets such as Europe and China.

This caused a decline in coal prices this year that led expensive mines to produce at a loss, but prices have been recovering since the end of the summer.

"The rise in spot prices since October will have restored profitability to marginal Australian mines, relieving the pressure on producers to moderate short-term volumes, and improving the outlook for the March contract negotiation," Deutsche Bank said in a research note.

European physical spot coal prices dropped from around $130 a tonne at the beginning of 2011 to below $83 last October, but prices have picked up to over $90 a tonne since then.

"According to our estimates, the rise in prices since late October has restored profitability to as much as 42 million tonnes of Australian export thermal coal production, and 7 million tonnes of Russian export thermal coal production," the bank said.

Deutsche Bank said that high Chinese coal inventories and mines returning to production would be headwinds for further price rises in the short-term, but added that it expected coal prices to rise over the course of next year.

"We believe that fundamental drivers will improve over the course of 2013 as U.S. gas prices stabilise at a higher level and Chinese economic activity accelerates towards the trend rate of growth in the second half of the year."

A sharp drop in U.S. gas prices on the back of the North American shale gas production boom has made natural gas more attractive for power generators in the U.S., leading to American miners to export their coal to European users, adding to an already oversupplied market.

But Deutsche Bank said that higher gas demand in the U.S. would push American gas prices up, leading to a reduction of U.S. coal exports, while Chinese demand for coal imports would rise, further supporting coal prices.

"Therefore, while the outlook in the next month is ambiguous, the second half of 2013 provides clearer signals for an improvement in thermal coal fundamentals next year," the bank said. (Editing by Alison Birrane)

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