SHANGHAI (Reuters) - A steep discount for Chinese versus international thermal coal prices could persist through the first half of the year, as global values are bolstered by rain-led output disruptions and Chinese demand enters a seasonal lull.
China has become the motor of the world coal market in the past two years after the closure of many of its own mines forced it to import. But in the past few months local prices have been relatively subdued, thanks to government crackdowns on power usage, inflation and — so far — the absence of a supply crisis triggered by winter.
At the same time, Australian miners are struggling to get back to normal after devastating floods decimated production, put a premium on their supplies and lifted the world market. The flood premium could linger into the second quarter, meaning a grim outlook for trading firms focused on spot sales into China.
“Thermal prices in Australia and South Africa will make it prohibitive for China to import large volumes from those countries in the first half. So we’ll be seeing pretty sluggish imports over the next few months,” said Bonnie Liu, a Shanghai-based analyst for Macquarie Bank.
For China’s coal-hungry southern provinces, the price gap between Chinese and Australian supplies widened to $30 a tonne in mid-January - the highest in eight months — when the worst flooding in Queensland since 1974 wreaked havoc on shipments.
Although the discount has since narrowed to about $19 a tonne, forward prices for both Australia’s Newcastle and South Africa’s Richard’s Bay coal futures suggest the arbitrage will stay closed at least until May.
Should this be the case, trading houses such as Trafigura, EDF Trading, Glencore and Gunvor — which thrived in 2010 selling millions of tonnes of Australian, South African or Colombian coal into China — would have to work harder to make their dollars.
Thermal coal prices in Australia, a benchmark for Asia, are hovering at about $151.80 per tonne on a landed basis into southern China and imports from South Africa cost $148, after adjustments for coal quality. But shipping coal from China’s Qinhuangdao to the south costs only $133 a tonne based on coal with heating value of 5,800 kcal/kg, net as received.
Australia and South Africa are China’s second and third largest thermal coal suppliers after Indonesia. Thermal coal shipments from the two nations were 22.2 million tonnes in 2010, or about a quarter of China’s total steam coal imports.
Some analysts reckon China’s thermal coal imports, which averaged 7 million tonnes per month in 2010, could fall to just around 5 million tonnes from as soon as February.
“As China cuts Australian and South African imports, the only other Asian supplier China could turn to would be Indonesia. But the wet season is only expected to end in March and forecasts show rains may drag beyond June,” Macquarie’s Liu said.
Most Indonesian miners are also still struggling to ramp up output after unusually long rains in 2010 slowed mining and prompted some coal companies, including PT Bayan Resources (BYAN.JK), to declare force majeure on shipments.
But hopes of drier weather returning are dampened by forecasts by the country’s weather bureau, which predicted the current wet season would stretch on until June.
“Chinese prices may briefly rebound as utilities rebuild their stocks, but the gap won’t close. Besides, the Chinese market typically enters a seasonal demand lull after February and that means domestic prices would either stay flat or move lower,” said Andrew Driscoll, an analyst at CLSA Asia-Pacific Markets, who is forecasting Shanxi blend coal to fall by 10 yuan to 765 yuan in the second quarter.
“Improved weather in the coming months would lift domestic coal production and increased hydropower could also put downward pressure on China’s coal prices.”
With Beijing vowing to combat inflation, trade sources said Chinese state-owned coal miners, which make up about half of coal production, are under pressure to keep down spot prices, with the government having ordered producers to keep 2011 contract prices unchanged from 2010.
Australia’s floods are expected to cut coal exports by 15 million tonnes in the period from December to March, but mining kingpin BHP Billiton (BHP.AX) BLT.L has warned operations could be hit for at least six more months — suggesting that total tonnage lost could be greater.
Although the flooding has mostly affected coking coal mines, it would offer support for thermal coal prices for months to come, as miners in both Queensland and New South Wales change their production mix to sell more higher-priced coking coal, with lower grade semi-soft and PCI coal fetching more than $100 a tonne compared to thermal coal.
Although Australia’s spot thermal coal prices have shed 8 percent since mid-January to $127 a tonne, analysts reckon prices may have reached a floor.
“We don’t see much more downside than this, with the slow recovery in (Queensland’s) Bowen Basin and high PCI and semi-soft coking coal prices keeping thermal coal supply tight for a good part of 2011,” said Mark Pervan, an analyst at ANZ Bank.
In Indonesia, the world’s largest thermal coal exporter, some suppliers said they have received more enquiries for shipments in the second quarter, but few have extra cargoes to offer and traders complain that maximum offers from Chinese buyers were at least $10 a tonne lower than market rates.
South African coal prices have received support from Asia’s supply tightness, with heavy rainfall also slowing output. Severe rains across Colombia have caused damage to mining and transport infrastructure.
“The government meteorological bureau has forecast the rains to last until March, and possibly even until May. So we expect Colombia’s export growth to be subdued this year,” said Raymond Chan, a thermal coal analyst at Standard Chartered.
Additional reporting by Fitri Wulandari and Michael Taylor in JAKARTA; Editing by Clarence Fernandez