Thermal coal prices continues to be depressed: ABARE

Thermal coal spot prices are set to continue to fall in the short term, before starting to recover after August when utilities begin to restock ahead of the northern hemisphere winter, which brings a spike in power demand, Australian government forecaster the Australian Bureau of Agriculture & Resource Economics said Monday.

In its June quarter report, Abare noted that thermal coal prices are down 5% from the start of the year to be around US$23.85 a ton at the end of May, and are likely to reach US$23.00/ton by the end of August as Japan's nuclear power industry is phased back. But by the end of the year, Abare expects spot prices to be back around US$26/ton.

Longer term, Abare is forecasting steady growth in the world thermal coal trade of about 2% a year, reaching 510 million tons in 2008 from 454.5 million tons in 2002, driven largely by new power generation in Asia, particularly Japan, South Korea and Taiwan.

But Abare warned that Australian exporters face rising competition from China, Indonesia and Russia, as well as lower returns given a strong Australian dollar against its U.S. counterpart.

Key for the market will be China, which is both a significant consumer and exporter. Abare is tipping China's exports to rise to 80 million tons in 2003 from 70 million tons in 2002 as Chinese producers benefit from higher freight rates in Asia, which make China's proximity to Japan a key competitive advantage.

China's market importance means the impact of SARS on the country could have significant ramifications for the market, Abare said.

"If the SARS virus continues to spread in China, economic activity and therefore electricity generation may be adversely affected, resulting in lower domestic demand for coal," Abare said.

"This in turn would lead to an increase in the availability of coal for export from China, which would erode Australia's share of the Asia Pacific thermal coal market," Abare said.

Australia's thermal coal exports are forecast to rise to 103.8 million tons in 2003-04 from 100.6 million tons in 2002-03, rising further to 107.2 million tons in 2004-05.

In nominal terms, Australia's export revenue from thermal coal is forecast to fall to A$4.23 billion in 2003-04 from A$4.52 billion, but will partly recover in 2004-05 to A$4.36 billion.(*)