COLUMN-Limited scope for further winter price boost for Asian coal: Clyde Russell

Thu Nov 21, 2013 12:25am EST

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(The opinions expressed here are those of the author, a columnist for Reuters.)

By Clyde Russell

LAUNCESTON, Australia, Nov 21 (Reuters - Spot coal prices in Asia have rallied 10.3 percent since the year-low in September, but producers' hopes for an even bigger boost from winter buying may be in vain.

The spot price of coal at Australia's Newcastle port , a regional benchmark, reached $84.63 a tonne in the week to Nov. 15, having bottomed at $76.70 in the week to Sept. 6.

In the past two northern winters, the price has peaked in late January to early February before falling back as the cold weather eases.

Last winter prices rose 18.9 percent from the low in October to the February peak, and the year before that they gained 10.8 percent.

This would imply there is still come scope for spot prices to rise further in the next two months, but there are some factors that make a strong rally unlikely.

Much will depend on Chinese imports and the level of domestic prices.

As China has improved its capacity to move domestic coal by rail and ship, domestic prices have effectively been leading seaborne prices as international producers are forced to compete with local miners.

The domestic price has been gaining in recent weeks, with the Bohai Bay Rim Steam Coal Index rising to 554 yuan ($90.96) a tonne last week from 545 yuan the prior week.

However, thermal coal futures on the Zhengzhou Commodity Exchange aren't indicating a sustained rally in prices.

The contracts were launched in September and have quickly established themselves as a liquid and viable benchmark even though trading is limited to domestic players and China-registered wholly foreign-owned enterprises.

The January contract was at around 568 yuan in early trade on Nov. 21 and the December future was at 580.4 yuan.

While these are above the latest Bohai Bay price, the January contract is only commanding a premium of around 2.5 percent, indicating that the Chinese domestic market isn't expecting a shortage of coal over winter.

COAL PRODUCTION STEADY

China's coal output rose 1.6 percent to 320 million tonnes in October from the same month last year, according to data on Nov. 19 from the China Coal Transport and Distribution Association (CCTD).

This brought production for the first 10 months to 3.096 billion tonnes, down 0.3 percent from the same period in 2012.

While domestic output has been largely steady, imports have grown strongly, with official customs figures showing China bought 196.65 million tonnes in the first nine months of the year, a gain of 18.6 percent.

Figures from the CCTD, which include imports of low-value lignite, suggest bigger volumes but similar percentage gains.

Imports totalled 260 million tonnes in the 10 months to October, a gain of 17.3 percent, the association said.

However, the recent gains in Newcastle prices have outweighed those for domestic coal, suggesting that the price advantage imported coal has enjoyed in recent months may be eroding.

Still, there are some bullish short-term factors, with inventories at China's Qinhuangdao port, a major shipment point, down to the lowest level since May.

Rising prices in Europe on the back of possible supply disruptions in Colombia and South Africa will also spill over into Asia, especially since South Africa acts as a swing supplier between Europe and Asia.

But these are short-term factors that may not boost prices on a sustained basis over winter.

For that to happen, Asia's major buyers will have to demand more coal, but, with the exception of India, it appears they may have adequate stocks available.

China's overall inventories are around 300 million tonnes, near record high levels, and stocks at major power plants are believed to be around 21 days consumption, a comfortable level.

While there is buying interest from China, traders report that most of this has been for low-rank Indonesian coal.

Unless the winter is colder than forecast, it seems unlikely that there will be rush for coal supplies, meaning that the Newcastle price may struggle to rally to levels above $90 a tonne. (Editing by Richard Pullin)

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