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Still no correction to global coal oversupply

World Coal,

Thermal coal markets remain oversupplied and could become more so as further production comes online in major coal producing countries. According to a note from Fitch Ratings, “the Asia-Pacific thermal coal market will remain oversupplied in the next 12 months because strong production has been slow to adjust to weaker demand.”


Colombia strike provided some relief…


One of the few regional where coal production has disappointed is Colombia, which has been hit by a strike at Cerrejon and Dummond’s coal operations, suspension of loading at Dummond’s port following an accident, and a ban on night railings at Fenoco, the main coal railway. Barring further disruptions, Bank of American Merrill Lynch (BoAML) predicts Colombian supply losses of nearly 8 million t this year.


…but the US, Russia and South Africa have taken up the slack


The supply gap from Colombia has not made much dent in overall coal supply, however. Strong exports from the US, Russia and South Africa – where stocks at Richard’s Bay coal terminal reached record seasonal highs on the back of weak Indian buying – more than covered the loss of shipment from Colombia.


And Australia and Indonesia keep growing


Meanwhile, the two largest exporters of coal – Australia and Indonesia – “continue to expand relentlessly”, say BoAML – up 32 million t year-on-year in the H1 2013.

Mine expansions began in the boom times and long-term take-or-pay contracts on rail and port infrastructure make Australian producers reluctant to cut back production. They have also benefited from a drop in the Australian dollar value against the US dollar: coal prices at the port of Newcastle have fallen by 19%, but given the 12% depreciated of the Australian dollar, local coal prices have only seen a decline of 7%. Similar trends have been in evidence in South Africa.

Meanwhile, in Indonesia, Adaro set a production record in Q2. Although a number of government moves in both Indonesia and China, which has proposed a ban on low quality coal imports, may eventually curtail coal production, the impact of such move will not be felt for a while.


Prices still to find bottom


With oversupply continuing, seaborne thermal coal projects are hitting four-year lows and may have further to drop, say BoAML. “The only way to clear the market is to inflict further pain on producers and force them to curtail output,” conclude the investment bank’s analysts. 

Written by Jonathan Rowland

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