COLUMN-Pain of drop in China coal imports isn't evenly shared: Clyde Russell

Mon Jul 29, 2013 2:43am EDT

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

By Clyde Russell

LAUNCESTON, Australia, July 29 (Reuters) - The sharp drop in China's coal imports in June helped to finally bring growth in imports closer to that for power output and was validation of the view that inbound cargoes had been unsustainably high.

While a pullback in imports had been expected for several months, the breakdown of the customs data shows the pain hasn't been evenly spread amongst China's major suppliers.

Total imports in June were 18.037 million tonnes, down 22 percent from May and 19.6 percent from the same month a year earlier.

This was enough to drag the year-to-date growth in coal imports down to 13.9 percent in June from May's 22.3 percent. The rate is also less than half the 28.7 percent jump in imports achieved in 2012 over 2011.

Part of the reason imports had been strong in the first five months of 2013 was that prices were competitive with domestic producers.

Falling domestic prices as demand for power generation eased caught up with imports in June.

But it's not necessarily the higher-cost suppliers that are being squeezed out of the market.

Of China's major suppliers Australia is still managing to post impressive gains in volumes.

China bought 4.928 million tonnes of coal from the world's biggest exporter in June, a gain of 31 percent on the same month in 2012, and taking the year-to-date total to 38.362 million tonnes, a gain of 46.5 percent over the same period last year.

Australia has overtaken Indonesia as the top supplier of coal to China, with shipments from the Southeast Asian nation totalling 35.263 million tonnes in the first half, a gain of just 8 percent on the same period last year.

The landed cost of Australian coal was $108.90 a tonne in June, while Indonesian was $80.93.

However, almost 35 percent of the coal shipped by Australia to China in the first half was higher value coking coal, used in steel-making.

But even looking at the customs category of non-coking, bituminous coal, which is mainly used for power generation, and Australia was still a clear winner.

First-half shipments of this type from Australia totalled 21.921 million tonnes, a gain of 35.9 percent, while those from Indonesia were 18.565 million tonnes, up 32 percent.

In June, the cost of bituminous supplies from Australia was $94.25 a tonne and those from Indonesia $79.60 a tonne.

While the price difference can be mainly explained by the higher energy value of Australian coal, it's interesting that Chinese buyers appeared willing to pay more, and take higher volumes, of the more expensive product.

This may be explained by Australian coal becoming relatively cheaper than Indonesian cargoes.

In December last year, Australian bituminous coal cost China $102.51 a tonne, meaning by June it was $8.26, or 8 percent, cheaper.

In contrast, the same category coal from Indonesia was $79.33 a tonne in December, meaning that by June it was actually slightly more expensive.

The benchmark Australian spot price, the weekly globalCOAL Newcastle port index, has been declining since its 2013 high of $96.09 a tonne on Feb. 8, and hit $77.04 on July 5, the lowest since November 2009.

The index recovered slightly to $77.55 a tonne in the week to July 26, but at that level coal prices are below the cost of production and transport to the port for many mines.

However, Australian miners are likely to continue producing as the loss from maintaining output is less than that for stopping, given the prevalence of take-or-pay shipping contracts.

These are fixed costs for miners that have to be paid regardless of whether volumes are actually transported, and they became common in order to give financial backing to the developers of multi-billion dollar railway and port infrastructure.

However, the pain threshold may be about to be reached, according to analysis by consultants Wood Mackenzie.

About 4 million tonnes, or 1 percent of Australian output, is at risk of being closed with a coking coal price of $171 a tonne and a thermal coal price of $92 a tonne, Wood Mackenzie said in a July 16 report.

This rises to 45 million tonnes if coking coal falls to $122 a tonne and thermal to $77 a tonne, and these price levels have largely been reached.

The longer prices remain depressed, the more likely it becomes that Australian producers will be forced from the market.

So far, the China customs data shows that Australia has managed to increase its share of imports to the world's biggest consumer of the fuel, but probably at the expense of profitability.

The losers among major suppliers include South Africa, which has seen exports to China decline 16.5 percent in the first half over the same period in 2012, and Mongolia, which has recorded a 31 percent drop.

Vietnam's shipments have slumped 11.1 percent and those from the United States have increased by a modest 3.7 percent, a far cry from the 90 percent gain in 2012.

The United States supplies mainly coking coal to China, and the cost was $156.59 a tonne in June, about $10 more than cargoes from Australia.

This makes it likely that on coking coal, the U.S. mines will likely be pushed out of China first.

Even though Mongolia is the cheapest source of coking coal for China, its main constraints are logistical and political, which makes forecasting volumes for the second half of 2013 largely guesswork.

On thermal coal, if prices remain at current levels, it becomes more likely Australian shipments will decline, as well as those from Russia, which is also a higher-cost supplier to China.

But much will depend on whether Chinese buyers are prepared to buy more for higher-quality Australian coal, or whether they are happy for this source of supply to exit the market, leaving cheaper Indonesian cargoes as the default option. (Editing by Joseph Radford)