Indon suppliers suspend fresh contracts to leverage prices

High demand from Indian power producers and looming coal export restrictions have had a unique impact on low-quality Indonesian coal prices.

At a time when the prices of high-value South African coal are softening, Indonesian coal of 3800 and 4200 gross calorific value (GCV) has become costlier by 10-15 per cent, on an f.o.b. (freight on board) basis, over the last month.

Freight on board indicates the cost of coal at the exporting nation. The landed cost will be relatively higher as freight has firmed up in the last month.

The Indian link behind the spike is apparent as 4000 GCV coal, largely imported by China, fell nearly 10 per cent last week following lower demand.

According to India Coal Market Watch, the country’s thermal coal import is estimated to have increased by over 20 per cent to nearly 110 million tonnes in 2012-13.

Export restrictions

Available information suggests that Indonesian coal prices stayed firm since January as production suffered due to inclement weather.

But the big change came in mid-February, when the Indonesian government reiterated its stand to cut down export of low heat-value thermal coal. Indonesia is the largest exporter of thermal coal.

Within two days, between February 13 and 15, prices of varieties imported by India shot up by approximately $2-3 a tonne each. And, since then, prices have firmed up further.

As on date 4200 GCV coal is sold approximately at $43 a tonne — up from nearly $38 a tonne in the first week of February.

During the period, 6000 GCV (net) South African thermal coal became cheaper by $2 a tonne and is expected to come down further. The more expensive South African coal is primarily used by the cement industry.

Normally, price movement of any fuel is unidirectional and proportionate to quality. It is assumed that better the quality, the higher the demand. The reverse may happen because of the lopsided demand scenario, as in the case of crude oil in 2010.

Importers in trouble

But coal has not witnessed such moves in the recent past. Naturally, importers were caught off-guard.

“The sharp spike was not anticipated and we even lost money on sales to end-consumers,” a prominent Indian importer told Business Line on condition of anonymity.

“Moreover, Indonesian sellers have stopped signing fresh contracts (with Indian importers) and are offering coal only on spot basis, to take advantage of the future movement in prices. They are anticipating prices to firm up further,” the importer said.

(This article was published on March 17, 2013)
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