PRLog - Sep. 6, 2012 - BRISBANE, Australia -- With more and more talk of China settling in for a hard landing rather than the Central Government’s carefully orchestrated attempts at a soft landing, thermal coal prices are continuing to suffer as a result. And as more negative economic data flows out of China, there is a growing sense of foreboding about what next year will mean for thermal coal prices and the coal industry in general.
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While global indices have been holding firm in recent weeks there is growing apprehension about where thermal coal prices may be heading in the coming year. Much depends, as it has in recent years, on China’s import coal volume purchased in the final quarter of 2012, and to a lesser extent demand from India.
But neither country’s economies are expanding at a rate sufficient to soak up volumes of coal from an oversupplied global market to see prices rise much above their current levels.Continuing negative economic data is turning talk of China’s soft landing into a hard landing. The release this week of HSBC’s China Manufacturing Purchasing Managers’ Index (PMI) for August was even worse than HSBC’s Flash China PMI released on August 23. A fall in the PMI from 49.3 in July to 47.6 in August has signalled a renewed decline in Chinese manufacturing output.
The only spark of optimism is from traders of Indonesian coal who says there had been increased inquiries from both Chinese and Indian buyers immediately following Indonesia’s Lebaran holiday at the end of last month but the market still remains quiet. A Singapore-based trader said a fellow trader had reported his business with China had increased from one Panamax trade per week before the holiday to five Panamax trades, although some of these trades were swap market trades. “The China factor is still to come into the picture and that’s when everyone will be piling in,” he said. “Chinese buyers are expected to return to the market this month. September is the crunch month.”
Traders are waiting to see how strong that demand will be but the speed with which the Chinese buyers secure cargoes to build coal stocks to the winter months may leave them with little time to react. “[Chinese buyers] will do business with four or five sellers at the same time so that other sellers will not be aware of the prices or volumes,” the trader said.
By the time prices begin to rise because of the increased demand the Chinese buyers have left the market.
However, with good stockpile levels at Chinese ports and power plants, the low price of domestically produced coal and a stalling economy, there is less expectation that volumes will be as great as previous years. September is the month when Indian buyers also return to the market after the end of the monsoon season but Indian ports are also well stocked.
An Australian trader said there were plenty of inquiries from Chinese buyers for Australian coal but this did not always lead to business. When sales are concluded it often has performance bonds attached such as asking for analysis of the coal at the discharging port rather than at Newcastle which allows the Chinese counterparties greater leverage to ask for price reductions if the cargoes do not meet the exact specifications.
“The CV may be 150kcal/kg lower than the specification but they will ask for a discount or possibly reject the cargo if the market price has changed,” he said.
Although the buyers are responsible for payment of demurrage for contracts on a CFR basis, which is how most of the Chinese buyers conduct their business, they often also ask the producers to pay for the demurrage before they are willing to land the cargo, the trader said.
An Indonesian producer said many Indonesian companies were cautious in dealing with Chinese counterparties because many were in financial trouble. However, the low rank coal producers only have two markets - China and India.
Low rank Indonesian producers were offering the 4,200kcal/kg GAR product at U$40.50/t FOB Vessel with buyers bidding $38.90/t, the Singapore trader said.
“The bid/ask spread of at least a dollar continues to limit trading between Indonesian sellers and Chinese and Indian buyers,” he said.
“The Chinese feel bearish about the outlook for the fourth quarter which they consider warrants more competitive pricing. The Indonesian sellers claim current pricing is close to production costs.”
Trades being done at lower prices are likely to involve distressed sellers hoping to generate some cash, the trader said. The possible cut in the Indonesian fuel subsidy for miners will further increase their production costs.
Weak demand and rising production costs will possibly require further production cuts if coal prices are to be stabilised at current levels.
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