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China's coking, thermal coal demand 'accelerates' post Lunar festival

By James O'Connell in London

April 22, 2011 - China's demand for commodities, including thermal and coking coal has accelerated since the country's Lunar New Year festival in February and shortages of coking coal are becoming apparent in the country, commodity analysts at Australia's Commonwealth Bank said in an April 18 report. (See related chart: Daily Coal Price Trends -- Physical ($/mt): July 2, 2010 - April 20, 2011)

The report, China: Ploughing Through Headwinds, summarizes discussions the bank's commodity analysts had with industry, banking and government contacts in the Chinese cities of Chongqing, Beijing, Qingdao, Zhengzhou and Shanghai in early- to mid-April.

"We left confident in accelerating short-term activity and commodity demand and ongoing medium-term growth," said the Commonwealth Bank of Australia analysts in their report. "China's commodity intensive growth will continue, particularly in central and western underdeveloped provinces," it added.

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Commenting on individual commodities starting with steel, the analysts said that China's steel output was forecast to rise to 650-700 million mt this calendar year from 626 million mt in the 2010 calendar year.

"The massive social housing program, plus development of central and western provinces, will underpin demand growth," the analysts' report said.

The Chinese government was planning to build 10 million social housing units in 2011, adding to the 57 million units it had constructed in the last ten years.

Car sales in the country were described as "robust" with 80% purchased using cash, and car sales were expected to continue to grow at a rate of 10-15% per year in the medium term, said the analysts.

China's current steel production capacity was estimated at 740-780 million mt and the sector was undergoing rationalization into larger companies as mills relocate from cities to newer industrial areas and put up larger, more efficient blast furnaces.

The Australian bank was told by its Chinese contacts that Chinese steel mills had increased their operating margins allowing them to adjust to recent higher market prices for iron ore and coking coal.

The Commonwealth Bank analysts said their discussions in China revealed that Chinese steel mills' demand for coking coal was rising in line with the trend to larger blast furnaces.

Shortage looms in coking coal

"China is becoming short of high quality coking coal. China's demand for, and import of, high quality coking coal will continue to grow," said the Commonwealth Bank analysts.

Australian, Mongolian and Mozambican coking coal would likely capture the "lion's share of supply growth over the medium term" in the Chinese market, they stated.

In terms of thermal coal, China was expected to stay as a net importer this year, though import volumes to China were likely to be lower than in 2010 due to imported thermal coal presently trading at a premium to domestic thermal coal in China, said the bank's Chinese contacts.

"China's thermal coal prices in 2011 are the same as in 2010 due to government mandated thermal coal price caps," said the CBA analysts.

Their Chinese contacts noted that the government's price caps have not delivered new sources of domestic coal supply to the Chinese market and was arguably counterproductive in capping prices.

In its current twelfth Five-Year Plan the Chinese government has placed an emphasis on developing new solar, wind, hydro and nuclear power plants in meeting electricity demand growth.

Significant investment was going into smart grid technologies under the twelfth plan that could complement thermal coal power generation and the addition of newer, more efficient power plants.

China was currently reviewing safety at its nuclear power plants and new plants were being delayed while re-engineering took place to enhance their safety controls against catastrophic failure in the wake of earthquake and tsunami damage to Japan's Fukushima nuclear plant in March, said the analysts.

Potential risks to China's commodity demand growth, such as rapidly rising housing costs, inflation, income inequality and fragmenting social cohesion, were seen as manageable by the bank's Chinese contacts.

"While China's growth outlook is not without its risks, we tend to agree that the authorities have the incentive and levers to manage most of these risks reasonably well," the CBA analysts stated in their report addressed to the bank's clients.

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