ANALYSIS - Coal prices set for record highs on Asia demand

Surging Asian demand and strong freight rates may be set to send coal prices jumping by around a quarter to record highs, wrong-footing buyers around the globe.

Tight supply could push prices to around $100 a tonne delivered in the European and Asian markets by winter, from recent levels around $80-$85.

European users may be caught out as Asia's buyers spread their nets wider for coal.

"All the consumers, not just in Asia, misread the market," a Russian coal exporter said. "We've been saying since before the beginning of this year that there was undersupply and prices would rise strongly."

An acute coal shortage in Asia is looming but consumers should manage to scrape by, producers, traders and utilities said.

"I think they will find coal but it won't be easy and they're going to have to look very hard for a spot cargo here and there. They'll be paying higher and higher prices, naturally," one trader said.

"We're going to get into the realm of hypothetical prices which won't mean anything because there won't be coal to be sold," another producer said.

The Asian market of Japan, Taiwan, South Korea, Philippines and including India and Pakistan, accounts for over half of global coal demand.

Around 90 pct of the 600 million tonnes a year global trade in steam coal is sold under long-term contract with the remainder traded as spot.

But many term contracts are priced against published indices which reflect spot prices.

ASIA DEFICIT TO REACH 25 MLN T

According to some coal producers, the Asian market faces a deficit of 15 million tonnes this year, which will have to be brought in from the Atlantic market. In 2008, this deficit could rise to 25 million tonnes, producers said.

As more South African coal is sucked into Asia, Colombia and the United States are the producers most able to fill the resulting shortfall for Europe, utilities said.

Increased Latin American coal demand, notably from Mexico, will absorb a large portion of the extra 10 million tonnes of Colombian production for 2007, Colombian producers said.

European demand has been lower than usual this year because the warm winter left a stocks overhang. But European power generating companies, gencos, will need some spot cargoes for Q4 and will have to compete against Asia.

Russian exporters said they are almost sold out for 2007 and will seek $75 a tonne FOB for remaining spot tonnes. They will be catching up with shipments delayed from this year for the first quarter of 2008.

"We're really talking about displacement of one type of coal from the Atlantic into Asia and whether there'll be enough of something else to take its place into Europe," one utility said.

LESS FROM CHINA

China's large-scale withdrawal from coal exports and the impact of heavy rains on Indonesian exports forced cement makers in India and Pakistan to turn to South Africa for coal. The subcontinent could import 10-12 million tonnes in 2007, up from just over 3 million in 2006.

This is a significant proportion of South Africa's likely 2007 total exports of 63-65 million tonnes.

Around four million tonnes of Australian exports are also likely to be pushed back into 2008 as a result of recent heavy rains.

Indonesia is the world's largest exporter, at around 200 million tonnes a year, but exports can drop easily by 30 million tonnes in a season of exceptionally severe rain.

Chinese exporters have made it clear to Asian customers that availability will be less this year and prices sharply higher. Chinese producers will give priority to domestic term supply contracts, market sources said.

The reluctance of Asian utilities to look further afield for coal has puzzled producers and traders who have been in talks with Asian buyers on potential sales of Atlantic coals for several months.

"They do still seem to be very laid back," a Pacific producer said. "I think it's been a mixture of being in denial about short supply, optimism that coal prices or freights will fall.

"And also, they just take a very long time to decide a change of strategy and things have been moving very quickly in the market."

The Korean gencos have all this year appeared calm in the face of shrinking availability and rapidly-rising prices.

The gencos have quietly bought Russian, Indonesian and South African coal on a small scale and outside their usual tender process and are now more actively seeking Q4 offers.

"The Koreans are asking everybody for offers of South African, Russian, whatever. It's a diversification, but not on a huge scale," another trader who regularly supplies to Korea said.