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
"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.
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.
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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
"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
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
"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
"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
"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, email@example.com