Thermal coal markets at risk of 10-15% price correction: sources

London (Platts)--10Mar2011/830 am EST/1330 GMT

A correction could lie in store for international coal prices, which have soared beyond the reach of many buyers in emerging economies such as India, warned two market participants during a panel discussion on thermal coal prices at the tenth Coaltrans India conference in New Delhi this week.

India-based coal trading firm Knowledge Infrastructure Systems' chairman and managing director, Rahul Bhandare, pinpointed inflation in the form of escalating commodity and energy prices as a "pressing concern" for developing countries.

"Coal prices have risen sharply from April 2010 to January 2011 and are almost 35% higher than the corresponding period in 2009-10," he said, adding that price rises may have been overdone.

"Prices in the short term will hold firm, but in the medium to long term a correction is required that could be as much as 15%-20%," said Bhandare.

Request a free trial of: International Coal Report
	International Coal Report and its daily companion, Coal Trader International, deliver expert and respected benchmark price assessments for coal trading in the Atlantic and Pacific markets including price assessments for European CIF ARA, FOB Newcastle, Richards Bay and Indonesia.

A correction of this magnitude would knock $18-24/mt off Richards Bay FOB spot prices, which were assessed by Platts at $120/mt on Wednesday.

The relative quality of some thermal coal imports supplied to Indian power plants has come under the spotlight recently, Bhandare said, with reference to another sought-after commodity in India.

"Coal supply to [Indian] State Electricity Boards is like Black Label Scotch. More is sold to India than is produced in Scotland," said Bhandare, explaining that Indian power utilities were using more thermal coal than was produced by both Indonesia and South Africa.

Bhandare went on to issue a wake-up call for the Indian power generation sector, saying their fixation on trying to match prices achieved in other tenders without reference to coal quality could be self-damaging.

"Power utilities have to get real and get away from the illusion that other buyers are getting cheaper coal. You get what you pay for," he said.

However, Bhandare added that coal-buying practices of Indian power utilities were slowly evolving.

"Sooner or later power utilities will become more dynamic," he said.

VOLATILITY HERE TO STAY

London Commodity Brokers Managing Director Paul Graham-Clarke echoed Bhandare's sentiments on the looming risk of a price correction to the international thermal coal market.

"Within the current economic global picture one of the biggest worries is inflation. We are seeing austere policies being introduced and I cannot see current prices being sustained. I see coal prices coming off by 10-12% from present levels," said Graham-Clarke during a question and answer session after the presentation.

"Why aren't we seeing some Indian and Chinese buyers? If demand is huge we should see prices still at $150/mt FOB."

Graham-Clarke said he expected any potential market correction to be short-lived, however, and forecast that international coal prices would recover toward the end of 2011 and into early 2012.

"Volatility is here to stay," he said.

In the next six years to 2017, India's capacity for electricity generation is forecast to grow to 215 GW. In order to meet this demand, India's present volume of coal imports would have to double, Graham-Clarke stressed.

LCB brokered coal deals involving 250 million mt last year, including 80 million mt in the Indian coal market.

CHINESE DEMAND, RUSSIAN SUPPLY

Australia and New Zealand Bank's director of energy sales, Marcus Pearl, said that international thermal coal prices had been driven by surprise events since last August, starting with extended rainfall in Indonesia and extending to the devastating floods in Queensland.

Without these weather-related events, the perception of the market's supply and demand position might have been different, he said.

"We still have some concerns about the relevance of demand in the market. If we see supply normalize, it could cause some issues," he said, adding that "the Newcastle market is well-supported at about $130-$135/mt FOB."

Chinese demand for imported thermal coal would be the key driver for coal market prices.

"The number one driver is when credible Chinese buyers come back to the market. I think it will be sometime around May," said Pearl.

Suek's emerging markets manager, Gao Yaoken, made the case for Russian thermal coal traveling to India by illustrating the relative cost of Panamax freight from eastern Russia to India, compared with Richards Bay to India.

In the past two years, the arbitrage window for Russian thermal coal exports to India has opened on a number of occasions, said Gao in his presentation.

"It has made sense for us to look at India. For Indian customers, it does make sense to pay attention to the level of freight from Russia," said Gao.

He added that, for the first time this year, the Russian coal producer's coal exports were split 50:50 between the Atlantic and Pacific thermal coal markets.

"For much of the time, freight from Vanino [on Russia's eastern seaboard] to the east coast of India has been more competitive than for Richards Bay to eastern India. Freight from Far Eastern Russia to the west coast of India has been at the same level as freight from Richards Bay and sometimes has been lower," he said.

Richards Bay to India Panamax freight has fluctuated between $14-21/mt during the past six months, according to Platts price assessments.

--Mike Cooper, michael_cooper@platts.com