Chinese demand may fuel coal contract prices

Asian contract prices for coal burned in power stations may reach another record next year, as China becomes a net importer of the fuel, Deutsche Bank and Goldman Sachs said.

Annual prices, settled for the year starting April 1 at a record of about $55.50 a tonne, may rise to $58 next year and $59.50 in 2009, Deutsche Bank said in a March 27 report. The bank raised its 2008 forecast by 12 per cent and its 2009 estimate by 16 per cent.

China Shenhua Energy, the nation's biggest coal producer, said on March 26 it would start importing the fuel from Indonesia and Australia because it costs less than shipping cargoes along the Chinese coast. Shipping delays at Newcastle port in Australia, the world's largest coal-export harbour, have helped boost spot prices this year.

"The prospect of China being a net importer of thermal coal as early as 2008 has placed material upward pressure on the outlook for contract prices,'' Deutsche said in the report.

"The thermal coal price outlook has improved significantly.''

China, the world's biggest coal producer and consumer, exported 12 per cent less coal last year than in 2005 and became a net importer of the fuel on a monthly basis in January, data from the General Administration of Customs show. The nation's economy expanded 10.7 per cent in 2006, the fastest pace in 11 years, spurring a 20 per cent jump in power generating capacity.

Xstrata, the world's biggest thermal coal exporter, settled contract prices for the year starting April 1 at about $55.50 a tonne, up from about $52.50 last year, said James Rickards, a spokesman in Melbourne. The Rio Tinto group agreed on a 2007-08 contract price in the mid-$50 range, spokeswoman Nicole Ireland said last month.

Goldman Sachs JBWere, the Australian unit of Wall Street's most profitable bank, expects the contract price to rise next year, while predicting a fall in later years. Goldman is using $55.65 as this year's benchmark.

The benchmark price might rise to $56 in the year starting April 1, 2008, before falling to $50 the following year, analysts led by Malcolm Southwood at the Melbourne-based firm said in a March 27 report. Demand in Asia-Pacific was set to remain strong, they said.

"There is scope for another small rise in benchmark Australia-Japan contract prices next year,'' the analysts said. "We believe export thermal coal prices will hold in the mid-high $50s a tonne free-on-board range through 2008, supported by a further contraction in the Chinese net exports at a time of strong demand throughout Asia-Pacific.''

China's thermal coal imports rose by almost 80 per cent in the first nine months of 2006 to 22.8 million tonne and were set to reach 30 million tonne in the full year, the Australian Bureau of Agricultural and Resource Economics said in a December 18 report.

Imports may rise 17 per cent to 35 million tonne in 2007. Chinese exports might have fallen 12 per cent in 2006 and might slide a further 3 per cent in 2007, the bureau said. Not all analysts expected a rise in contract prices next year.

Australia and New Zealand Banking group would probably raise its forecast from the current $43 forecast, yet the revised estimate would likely still be no more than about $50, said Andrew Harrington, the bank's commodities analyst in Sydney.

"It's hard to envision ongoing prices climbing: the supply response is there and then the issue around China's reduction in exports may tail off a little bit,'' Harrington said. "We're likely to see prices stronger than $43, but I don't think we're going to get it up into the top half of the $50s.''

National Australia Bank, the nation's biggest, will probably raise its $50 a tonne forecast for 2008-09 contract prices to "something more like an increase'' from this year's prices, said Gerard Burg, minerals and energy economist at the Melbourne-based bank.

"China's changing export position has really changed the game,'' Burg said in an interview. "I think from this year they're already likely to be a net importer. That will tighten things up quite a lot.''

While China's move to cut exports has increased domestic supplies, proposed closures of unsafe mines might cut production should those plans be followed through, Burg said. Indonesia, the world's biggest thermal coal exporter, might have only a 'modest' increase in exports this year, he said.

FIRMING UP

Annual prices, settled for the year starting April 1 at a record of about $55.50 a tonne, may rise to $58 next year and $59.50 in 2009, Deutsche Bank said in a March 27 report

The prospect of China being a net importer of thermal coal as early as 2008 has placed material upward pressure on the outlook for contract prices

China's changing export position has really changed the game and it will tighten things up quite a lot