COLUMN-Asian coal volumes may rise, price may not: Clyde Russell

Wed Jan 2, 2013 12:38am EST

--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, Jan 2 (Reuters) - Coal producers supplying Asia are likely to have a busy year, but that increase in demand won't necessarily translate into much higher prices.

The price of spot coal at Australia's Newcastle port , the regional benchmark, recovered 14 percent from a near three-year low in the last two months of the year to end 2012 at $92.25 a tonne.

But this was still down 20 percent over the whole of 2012, making coal one of the worst performing commodities in a year during which the International Energy Agency predicted it would take over from oil as the world's top fuel by 2017.

Coal's poor performance belied a 27 percent jump in China's imports in the first 11 months of the year, and a similar 26.8 percent gain in India's purchases in the first eight months of the fiscal year that started in April.

But global supplies of the fuel are plentiful, with Barclays estimating that an additional 82 tonnes, or 10.5 percent, made its way onto world markets in 2012.

An additional 32 million tonnes may be available in 2013, Barclays said in a report dated Dec. 21.

But as growth in supply this year will be less than half of what it was in 2012, there is potential for the seaborne coal market to tighten a bit, especially if demand in Asia's two growth centres for the fuel continues at the same pace.

Assuming China's growth rate for the first 11 months is maintained in December, it will have imported about 49 million tonnes more in 2012 than in 2011.

India experienced a massive 73.6 percent jump in imports to 10.85 million tonnes in November, which boosted the overall rate for the April to November period.

Nonetheless, India may import as many as 28 million tonnes more in calendar 2012 than it did in 2011.

This means together India and China may have imported an additional 77 million tonnes, not too far off Barclays estimate of 82 million tonnes in extra supply.

Of course, these two nations aren't the only determinants of the overall coal market balance, but they are likely to be the key swing factors in 2013, especially as the situation in Europe, the second-largest coal importing region, remains steady.

It seems that cheap global prices spurred an increase in consumption in Europe, where coal gained at the expense of more costly natural gas for power generation.

It's likely that coal will remain competitive against gas in Europe in 2013, making it a reasonable assumption that imports will be at least steady.

This once again will leave Asia's demand growth as the likely determinant of price, assuming the growth in available supplies is modest.

Predicting demand for imported coal in China has become tougher given the government's decision to take a more hands-off approach to regulating the market.

The government will scrap a cap on spot thermal coal prices and no longer intervene in contracts between sellers and utilities, the National Development and Reform Commission said last month.

This likely means that utilities will lose access to supplies at preferential rates, but will benefit from shorter-term contracts that will be more flexible.

It also means that imported coal will be able to more freely compete with domestic supplies, which has the potential to boost imports as long as the prices are competitive.

The price of domestic coal was 634 yuan ($101.77) a tonne last week, according to data from sxcoal.com, and $114.93 a tonne, according to McCloskey's Quinhuangdao price CO-FOBQHG-CN.

Given freight costs and import duties, Newcastle coal can only compete if it stays around the current price, meaning there may be volume gains available for producers in Australia, Indonesia and South Africa, but only if they accept prices can't rise much higher.

There is a fairly strong correlation between China's coal imports and the Newcastle price, with a decline in inbound cargoes in the third quarter of last year coinciding with a slump in prices.

India's coal imports are also likely to experience growth in 2013, mainly because domestic production is once again likely to fall short of targets.

Coal India aims to produce 470 million tonnes in the year to March 2013, a number the company's chairman S. Narsing Rao said was "sacrosanct" in an interview with Reuters last month.

However, in the first eight months of the fiscal year, Coal India, which accounts for 80 percent of the nation's output, managed to mine 265 million tonnes. If this rate was maintained for the remaining four months, full-year production would be just shy of 400 million tonnes.

Even if Coal India managed to boost monthly output to around 41 million tonnes, which was the target for November, it would still only produce about 425 million tonnes in 2012-13, a number below the company's target by about 45 million tonnes.

Any shortfall is likely to be sourced from overseas markets, meaning India's import demand may continue to post strong gains.

The key to Asian coal demand in 2013 is likely to be just how far short India's domestic output is from the target, and how the deregulation of China's vast domestic market plays out. (Editing by Miral Fahmy)

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