China lights thermal coal price fireBy Javier Blas in...

China lights thermal coal price fire
By Javier Blas in London

Published: January 13 2010 17:51 | Last updated: January 13 2010 17:51

The price of thermal coal, used to fire power plants, has surged above the psychological $100 a tonne barrier for the first time in more than a year as the wave of cold weather exacerbates Chinas swing from exporter to importer.

Desperation buying by Chinese utilities has caused the spot price to leap, says Alan Heap, commodities analyst with Citigroup in Sydney.

The Chinese thermal coal market has tightened after heavy snow in northern China disrupted mining operations and railway transportation. But the countrys supplies were already low before the weather problems hit. Beijings shift to the status of importer comes largely on the back of a clampdown on illegal and unsafe mining, which forced the closure of hundreds of small mines in Shanxi province, the key producing area.

In response, coal traders said China was purchasing farther afield from its traditional supply base of Australia, Indonesia and Vietnam to offset its domestic shortages, buying this month cargoes for the first time in Colombia.

This is extraordinary. It had never happened before, says Gerard McCloskey, chairman of coal information and consultancy McCloskey Group in London.

Analysts estimate China had net imports of more than 50m tonnes of thermal coal last year, a big U-turn from net exports of about 70m-80m tonnes in 2005.

Brendan Fitzpatrick, mining analyst at Deutsche Bank in Sydney, says Chinas shift from exporter to importer was the key change in the seaborne market. Before it, miners were braced for a protracted period of low prices because of lacklustre demand in Japan, South Korea and Taiwan, the traditional buyers.

Looking forward, most analysts, traders and executives believe China will continue to buy significant quantities of thermal coal overseas.

Clinton Dines, former chief executive of BHP Billiton China, says that there might be some minor wobbles, but concludes: China is going to be a coal importer of some scale from now on.

Richard Navarre, president of US-based Peabody Energy, which describes itself as the worlds largest private-sector coal company, agrees with the view. We think that China is going to continue as a net importer of coal, he says, adding that consumption in the Asia-Pacific basin is continuing to strengthen.

In fact, Andreas Bokkenheuser, a mining analyst with UBS in Singapore, says the thermal coal price rally could continue during the first quarter because Chinese electricity demand and the need for coal to fire power stations is going to rise further and the supply train is very much likely to get worse.

Indias imports of thermal coal are also expected to remain strong this year as the country expands power generation, analysts and executives say.

As demand recovers, export infrastructure constraints, particularly in Australia, are once again becoming an issue, further tightening the seaborne thermal coal market. At Australias largest thermal coal export port of Newcastle, the ship queue recently reached a two-year high, with 60 vessels waiting to upload coal.

The sum of rising demand and supply bottlenecks this week pushed the spot price of the benchmark thermal coal in the Australian market to about $105 a tonne, the highest since November 2008 and up 60 per cent from Marchs low of $61 a tonne.

The surge in thermal coal prices mirrors sharp gains in other bulk commodities such as iron ore and coking coal, used to manufacture steel. Because financial investors do not have any influence in those physical commodities, analysts see their price movements as a pure reflection of supply and demand fundamentals.

Although spot coal prices stand well below July 2009s all-time high of more than $210 a tonne, the recent rally bodes well for miners Xstrata, BHP Billiton, Anglo American, Rio Tinto and Peabody, which are now negotiating the price with Asian utilities for the annual Japanese fiscal year contracts due to start in April 2010. Higher demand is also good news for coal traders Glencore, Vitol, Trafigura and Noble.

Analysts, mining executives and traders anticipate a sharp rebound in the 2010-11 annual contracts, with most forecasting a 20-25 per cent leap to at least $85-$90 a tonne. Last years contracts were settled at about $71 a tonne.

Xstrata and Tokyo Electric have reached a contract settlement for the 2010 calendar year at $85 a tonne. Executives say the settlement is bullish for the Japanese fiscal year contracts, which account for the bulk of long-term supply.