Global coal prices seen dipping further as China seeks to compete

Wed Sep 11, 2013 3:20pm IST

* Chinese miners try to squeeze out imports

* Weak Indian currency dampens its import demand

* Prices to receive support once unprofitable mines close

By Henning Gloystein

LONDON, Sept 11 (Reuters) - Global physical coal prices will face downward pressure in the next year as Chinese miners reduce prices to compete with outside producers such as Australia, analysts said on Wednesday.

Coal prices have already dropped around 20 percent since peaking in January, and analysts say they could fall further as Chinese producers add to an oversupplied global market.

"International coal prices will face downward pressure as major Chinese coal producers cut prices to compete for market share and stifle domestic demand for overseas shipments," Fitch Ratings said in a report.

Goldman Sachs said in a research note: "Coal prices in the Chinese domestic market continue to soften ... and we expect Chinese imports to moderate accordingly in the coming months."

Thermal coal has been the worst-performing bulk commodity this year, Goldman added.

Bank of America Merrill Lynch (BoAML) said in a note that the market was oversupplied.

"Physical oversupply continues to plague the market (and) the outlook is everything but rosy," BoAML said.

The bank said a Colombian coal miner strike would likely end soon, adding more supply to the market, while stock levels in key import markets were already high.

Analysts said India's coal imports would also drop as its steep currency decline of the last months would dent its appetite for coal imports that have to be paid for in dollars.

As a result, BoAML said it had lowered its Australian Newcastle coal price forecast for the fourth quarter of 2013 to $74 per tonne, from $84 previously, and that it had downgraded its average 2014 cost from $91 to $82 per tonne.

Despite this downward pressure, some analysts said prices would receive support once some exporters cut production in mines that could not operate profitably at low costs.

"Production cuts are likely because a substantial amount of Indonesian and Australian coal is being sold below cost," Fitch Ratings said, with BoAML estimating that over 20 percent of coal exporters are not covering their costs.

"In the long term, we expect thermal coal prices will recover towards our $85 per tonne estimate of cost support (free on board Newcastle 6,000kcal NAR basis)," Goldman Sachs said.

Coal prices in Europe have also received support from rising demand in Germany recently.

Demand in Europe's biggest economy grew by 15 percent year-on-year to 25.7 million tonnes in the first six months of 2013, driven by lower domestic production and increased coal burning in power plants. (Editing by Dale Hudson)

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