Global thermal coal prices may continue to remain at lower levels till early next year due to a drop in demand from China and India, said a Fitch report on Wednesday.

The price of thermal coal (5,500 kcal coal at Newcastle Australia on a free-on-board basis) hit a two-year low of $87 (Rs 4,785) a tonne in June from $142 a tonne recorded in January last year.

Besides the economic slowdown in India and China, the prices were hit by an increase in production and exports from Indonesia and Australia. Exports from the US also jumped due to cheap natural gas replacing coal used in power generation, it said.

Coal prices could recover if demand from key importers — China and India — improves. India’s dependence on imported coal has increased as domestic production has been hit. In China, thermal coal fired power represents more than 70 per cent of the country’s energy needs. Thermal coal demand from China would lift again following a sufficient policy easing by the Government, it said.

SUPPLY SIDE CONCERNS

The weak pricing environment is exposing the business risks of high-cost coal producers, as coal prices fall near or below the marginal cost of production. Many Australian producers have high cash costs of production. Such operators will be significantly affected if prices remain low for an extended period.

At the same time, sustained low coal prices could shift buyers from low-rank coal to higher-grade coals and, thus, negatively affect both demand and the realised prices for low-rank coal, said Fitch.

Should the current low price environment persist into 2013, Fitch expects high-cost producers in Australia and the US to undertake production cuts, and review expansion projects under consideration. Fitch also believes that production expansion plans by low-cost producing countries such as Indonesia may be curtailed. Such actions would limit coal production levels and help address oversupply.

(This article was published on June 13, 2012)
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