Commodities | Aug 23 2006
By Chris Shaw
While higher oil prices have had a negative impact in areas such as domestic consumption thanks to the increase in fuel prices the coal market has actually been a beneficiary as it makes coal a more attractive alternative in terms of relative prices.
As National Australia Bank notes in its quarterly review of the coal sector this has allowed demand to remain firm, helped by ongoing supply constraints and lower exports coming out of China as that market focuses more on ensuring an adequate domestic supply. Also proving beneficial has been the upturn in global steel production in recent months, which has led to stronger than expected demand for metallurgical coal.
The result has been prices settling at relatively stable levels, the bank noting thermal coal contract prices are centred around US$52.50 per tonne, a level largely unchanged on the previous year. Metallurgical coal prices haven’t been so lucky, with the contract price looking likely to settle around US$56.50 per tonne, down 34% on last year.
There appears to be further downside coming, as the bank is forecasting a further fall in coal prices next year as some of the current supply constraints are removed and the start-up of new projects and expansion of existing projects lifts overall supply. It is a view shared by GSJB Were, who is also forecasting an increase in supply next year that is likely to be enough to see prices move below current levels.
In metallurgical coal the bank expects current contract negotiations to continue to drag on, as it notes increases in supply mean Japanese buyers have little pressure to settle quickly. With exports from Australia expected to increase by 5.3% this year to 132m tonnes and to 140m tonnes next year, it is apparent the market conditions are tilted in favour of the buyers.
This is before factoring in forecast increases in production in Canada, which next year are tipped to increase by about 10% to 34m tonnes. Even with China and India expected to increase their imports, the bank sees a further weakening in prices. It is forecasting semi-soft prices will hit US$50/t next year from this year’s US$56.50/t, while for hard coking coal it is expecting a 15% decline to US$100/t, compared to GSJB Were’s estimate of US$90/t.
For thermal coal, the bank is expecting a price decline of about 12% to US$46/t, driven in the short-term by higher supply from Indonesia and longer-term by additional exports from Australian producers. Weres are not as negative, tipping prices to fall only to US$50/t on the expectation demand returns to more normal levels, softening at least to some extent the impact of higher supply.