Thermal coal prices to drop further on oversupply, weak demand

Thu Mar 20, 2014 5:51pm IST

* Mining output to rise in Australia, Colombia, South Africa

* Demand in emerging markets weakens

LONDON, March 20 (Reuters) - Thermal coal prices are likely to fall in 2014 as mining output increases in an already oversupplied market while demand in emerging markets drops, analysts said on Thursday, amounting to a third straight year of declines.

Prices of coal, the top fuel used to generate electricity in the world, have halved from a peak in 2011 and are down almost 70 percent from their all-time highs in 2008. Analysts say they are likely to weaken further.

"As global output is now set to expand, we believe the supply overhang will persist and revise our forecast for (Australia's) Newcastle coal lower to $74 per tonne as an average for 2014, down from $82 per tonne previously," Bank of America Merrill Lynch said in a research note on Thursday.

"We also expect front prices in Europe to hit $70 per tonne at some point during 2Q (the second quarter of 2014)," it added.

Analysts said the low prices were a result of healthy mining output in export countries such as Australia, Colombia and South Africa combining with weakening demand, especially in China and emerging markets.

"Excess supply from producing countries exacerbated by weakened Asian demand growth have continued to affect current international coal trade price behaviour significantly," French bank Societe Generale said in a research note, also on Thursday.

Analysts said that Chinese efforts to begin using more natural gas for power generation rather than coal, which is dirtier, could further erode thermal coal markets.

"A combination of widespread loan defaults ... and clean air initiatives in China could spell even more trouble for sea-borne coal in the months ahead," Bank of America Merrill Lynch said.

China's Premier Li Keqiang this month said the country would "declare war" on pollution and that the government would unveil detailed measures to tackle what has become a hot-button social issue.

Despite the current oversupply and weakening demand, analysts said prices could begin picking up towards next year.

"The situation should improve in 2015, when demand from Asia (primarily India and China) has the potential to act as a primary catalyst in hastening the reduction of the current oversupply in the market," Societe Generale said.

Bank of America Merrill Lynch said that "the sea-borne market looks a bit more balanced in 2015 as exports slow due to mine ramp-ups tailing off, and imports improve with global economic activity". (Reporting by Henning Gloystein; editing by Jane Baird)

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