ANALYSIS-La Nina, China demand to boost coal prices

Mon Nov 15, 2010 1:05pm IST

* La Nina signals strong cyclone season in northern Australia

* Indonesia output already 5 to 10 percent behind

* Australian thermal coal could climb to $120/tonne

By Rebekah Kebede and Fitri Wulandari

PERTH/JAKARTA, Nov 15 (Reuters) - A strong La Nina effect threatens more drenching of waterlogged coal production areas in Australia and Indonesia over the next six months, cutting exports and driving up prices just as Chinese winter demand kicks in.

As a result, prices for Australia's thermal coal, the Asian benchmark, could move as high as $120 per tonne before the end of the year from around $109 now, said Mark Pervan, head of commodity research at ANZ Bank in Sydney. A price above $120 would be the highest since September 2008.

"The likelihood of a strong winter coming through in north Asia, dovetailed with what looks like a pretty tight supply backdrop, will probably see the market move up another $10 a tonne," Pervan said.

Australia is the world's largest coal exporter and, combined with Indonesia, produces more than 10 percent of global thermal coal supplies.

The La Nina effect has raised forecasts for rainfall in both top coal exporters, nearly doubling the number of cyclones expected in Australia's northeastern coal belt to six or seven from an average four.[ID:nSGE69I02V]

"We're heading into the time of year between now and April next year where cyclone season hits up north," said Gavin Wendt, a senior resource analyst at Mine Life in Sydney.

"We always get a seasonal spike in thermal coal pricing around about this time of the year, but that's going to be exacerbated by strong Chinese demand and don't forget Indian buying as well."

Chinese demand has escalated recently as the world's largest coal consumer tries to stockpile ahead of a frosty winter, with buyers hunting for coal deals both in Asia and also casting their nets farther afield, most recently striking a deal for South African coal. [ID:nLDE6A10T2]

Although Chinese stockpiles are relatively high at more than 6 million tonnes, spot supplies in China have tightened over the past month as cold weather disrupted some coal production. [ID:nTOE6A403H]

"I think we'll find that the Chinese will re-stock quite aggressively in December," ANZ's Pervan said.

Indian import demand for coal is expected to grow by more than 80 percent by 2012, and Indian buyers, already one of Indonesia's main coal customers, are expected to feed their growing appetite by sourcing coal from Indonesia. [ID:nSGE6850BQ] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

China coal imports/exports: link.reuters.com/bux72q

Coking coal imports: link.reuters.com/cux72q

China coal imports/Australian Newcastle index price:

link.reuters.com/qaz72q

India coal imports & forecast:link.reuters.com/sej97p ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

INDONESIA OUTPUT TRAILS TARGETS

Unseasonally wet weather has already hit Indonesian production, particularly from smaller miners, and with months of of rain still ahead, exports are likely to be affected into 2011.

"The majority of Indonesian coal producers have already seen their output falling about 5 to 10 percent below where they usually are with respect to their targets at this time of the year," Andreas Bokkenheuser an analyst with UBS in Singapore.

Smaller miners have been particularly hard hit as they fall months behind their output targets, wiping out tonnage they need to ship for existing contracts.

"We have to reject requests from buyers even for next year delivery because we don't have any coal. We still have 800,000 tonnes in outstanding contracts that we need to fill for this year," said one East Kalimantan producer with an output of about 200,000 tonnes a month.

Some of Australia's thermal coal production has already been affected by unseasonal rains in Queensland state, even though the region produces mostly coking coal.

Predictions that northeastern Australia will get soaked during cyclone season point to a high probability that the world's largest coal port, Newcastle, will suffer export backlogs this season, analysts said.

Wet weather has resulted in export disruptions from Newcastle as both production and transport to the port are derailed.

Some in the industry have warned that this cyclone season may resemble the 2007/2008 cyclone season, when strong demand before the global financial crisis combined with wet weather to cause prices of both coking and thermal coal to spike.

"Time will tell how much damage La Nina can make, but at the current stage, it's not looking good at all. It will be 2007 all over again," one Sydney-based trader said. (Editing by Ed Lane)

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