Asia's thermal coal supply squeeze to worsen in '08

By Fayen Wong

BRISBANE (Reuters) - Asia's thermal coal supply squeeze, which has driven spot prices to record highs of over $72 a tonne, is set to worsen next year as Indonesia and Australia struggle to meet feverish demand growth in China and India.

Tight supply could push spot prices to average about $75 a tonne in the first quarter of 2008, traders and producers said, and long-term contract prices between Australian producers and Japanese utilities by as much as 10 percent.

"The market is going to be very, very tight next year. It will be worse than this year," Peter Ball, vice president for marketing at Indonesia's largest coal producer PT Bumi Resources, told Reuters.

"Apart from China and India, demand will also rise when Mexicans start to come to the market. When they finally do, we don't know where the coal is going to come from."

Coal consumption is expected to increase rapidly in Mexico, where state utility Federal Electricity Commission has mapped out plans to increase its generation capacity to 56,785 MW by the end of 2012, compared with current 49,834 MW.

According to globalCOAL's NEWC index, spot thermal coal prices for the first quarter of 2008 were traded at about $71, while average price for the year stood at $65-$68.

"Considering the recent China-Japan 2007 contract price was struck at a $67.90 a tonne, a 10 percent increase between Australian and Japanese for 2008 contract is not overly bullish," said Clyde Henderson, an analyst at Wood Mackenzie consultancy.

The impact of China's surging appetite for coal in recent years has largely been cushioned by a corresponding swell in Indonesian coal output, which has surged by 20-25 percent each year.