Commodities | Jun 27 2012
– Thermal coal prices continue to be under pressure
– Strong production, higher US exports and lower Chinese import demand are all to blame
– Supply side adjustments needed to balance market
– Analysts are adjusting price forecasts
By Chris Shaw
As noted by Commonwealth Bank, in the period from April 9 to June 25 Qinhuangdao thermal coal prices have fallen by 14% to US$105.29 per tonne, while coal stocks at the port have risen 28% to 23.3 million tonnes.
Over the same period the Richards Bay thermal coal price has fallen 18% to US$95.75 per tonne, while Newcastle thermal coal prices have declined 20% to US$94.78 per tonne. This means both Richards Bay and Newcastle prices have moved below domestic prices at Qinhuangdao, so providing support for Chinese imports of thermal coal.
The risk in CBA's view is if Qinhuangdao prices fall further, as this would likely see Chinese buyers step away form seaborne thermal coal. This would increase the pressure on thermal coal prices at Richards Bay, Newcastle and Indonesia in coming months.
Another factor that is dogging the thermal coal market at present are increasing US thermal coal exports. This is stemming from reduced US consumption as US power utilities have switched to cheap natural gas to produce electricity.
This trend may not be so long lasting, as CBA notes total US coal exports are now running above nameplate port capacity of around 96 million tonnes. But for as long as US thermal coal exports remain at historically high rates, CBA expects seaborne thermal coal prices are likely to remain under pressure.
Taking a medium-term view, Macquarie suggests the recent weakness in thermal coal prices is not a significant issue, as the supply side is expected to adjust to the current low pricing situation. In Macquarie's view there are some early signs this process is already underway in China as coastal shipments, which represent the most marginal element of supply, are starting to fall and production in some regions appears to be easing.
By the final quarter of this year Macquarie expects prices will pick up given winter restocking. Macquarie suggests even if power generation is flat year-on-year by the end of 2012, total coal burn in China should still be 10-20% higher than it is today.
To reflect the view Chinese demand will stay weak in coming months but pick up towards the end of the year, Macquarie has revised its thermal coal forecasts. For the second quarter the broker now expects average Newcastle prices of US$97 per tonne, then US$90 per tonne in the third quarter. These compare to previous forecasts of US$103.50 per tonne and US$105 per tonne respectively. Similar changes have been made to Richards Bay forecasts. Macquarie's longer-term price expectations are unchanged.
For UBS, the key to price stability in coal markets now comes in the form of production cuts. UBS notes prices have fallen below the industry's marginal cost of production on the back of subdued global economic activity, a relatively warm northern winter and uninterrupted high production from the likes of Australia, the Americas, China and Indonesia.
Lower output from higher cost miners in the likes of the US and Australia is needed to achieve some price stability in the broker's view. UBS suggests the process has started in the former and should soon follow in the latter. But Deutsche Bank suggests US production cuts to date have been modest overall, as early June production was down only one million tonnes in year-on-year terms.
The reason production cuts are needed according to UBS is that Chinese thermal coal imports have not expanded in response to the recent weakness in prices. The most likely reason for this is reportedly substantial inventory levels in China at present.
Macquarie estimates Chinese inventory at major power plants at present is 27-28 days This may reflect a deliberate attempt to lift stocks, as Macquarie notes some provinces in China are attempting to build stocks towards 30 days of consumption given chronic coal shortages.
Under current market conditions, UBS suggests an absolute low for thermal coal is somewhere around the US$55-$60 per tonne level. But with production cuts already being reported prices are considered unlikely to fall that far, the broker suggesting a floor near current levels is more likely, meaning spot prices hold around US$80-$100 per tonne.
For Japan's FY13, UBS is forecasting Newcastle prices of US$110 per tonne, while the broker's long-term price forecast is unchanged at US$85 per tonne. The stockbroker's Richard's Bay forecasts are at US$115 per tonne for 2013.
Assuming spot prices are now close to a floor, UBS sees upside risk for the more exposed plays, with Whitehaven Coal ((WHC)) the only Australian listing in this group. UBS rates Whitehaven as a Buy, a rating matched by the other six brokers in the FNArena database to cover the stock.
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