KUALA LUMPUR: Standard Chartered Global Research has upgraded its 2011 forecasts for global thermal coal prices based on tighter-than-expected fundamentals but uncertainties loom in China, Indonesia and Australia.
It said on Saturday, Jan 15 the impressive run in coal markets resembles 2008 but is unlikely to breach its previous high, adding that it was 'bullish short-term, but highlight the risk of setbacks in 2Q as seasonal demand fades'.
StanChart Research said it had on Nov 18, 2010 it had issued a report where it had forecast US$116 per tonne (t) for Newcastle coal, free-on-board (FOB) basis, based on a global deficit of 4.8 million tonnes (mt) before the full impact of floods in Australia, in terms of supply disruption, had been factored in.
'The floods, which initially started in September, escalated in December, and ongoing bad weather in Australia, Colombia and Indonesia has put pressure on global supply and we now believe there are significant downside risks to supply for 2011.
'We are therefore upgrading our full-year 2011 forecasts to US$114 per tonne, US$115 and US$126, respectively, for API4 FOB, API2 CIF and Newcastle FOB,' it said.
(The API 2 index is the international price benchmark for coal imported to northwestern Europe. The API 4 index is the international price benchmark for coal exported from the Richards Bay terminal in South Africa).
The research house said its upgrade was partly based on supply disruptions, but also on firm demand, mainly from India and South Korea.
It said it was bullish short-term as it did not expect weather-related disruption to ease any time soon, but it remained cautious about 2Q, when seasonal demand should fade.
Below is the research report issued by StanChart Global Research
Australian floods in the headlines
Output to stay below pre-flood levels for at least another three months. The worst floods in 50 years in Queensland, Australia, have dominated the headlines since they escalated in early December. They have prompted force majeure declarations from a number of producers.
The scale and duration of the floods was uncertain when they began in September, but continuous rains have brought exports to a complete halt in Queensland and global coal prices have soared as a result.
Coking coal prices surged first, but thermal coal prices are also benefiting from the knock-on effect as competition with higher-valued coking coal for railcar access has intensified.
In our view, Australian supplies face further downside risk as floods have washed away key rail and road links. A Reuters survey also showed that market analysts expect it to take at least three months for output to recover to pre-flood levels. We therefore expect Newcastle FOB prices to trade in the US$130-US$150 a tonne range in January and early February, before seasonal demand begins to fade in March.
Issues in Colombia and South Africa complicate matters: Bad weather also affects Colombia but the global impact is small Severe rains across Colombia, also attributed to the La Ni''a phenomenon, have caused damage to infrastructure that has slowed coal mining and transport.
The government meteorological bureau has forecast the rains to last until March, and possibly even until May. We therefore expect Colombia's export growth to be subdued this year.
South Africa could export more but with little effect on global balance South Africa is also experiencing heavy rainfall. To date, this has not had a direct impact on its exports, but the slowdown in rail transport has reduced stocks to very low levels in the Richards Bay Coal Terminal.
We believe South Africa can improve exports further, to the 65-70mt level, from 2010's 63.43mt, but this will not be enough to relieve pressure on the global demand-supply balance.
Indonesia is an important wild-card.
Dominates competitors in terms of supply growth ' weather is key.
While we expect more downside to Australian supply and we do not think Colombia and South Africa can cover the lost tonnage, Indonesia will be as important as Australia in driving the global supply and demand balance this year. Despite industry consultant McCloskey's expectation that 80mt of Indonesia's output will go to local markets in 2011, compared with 64mt last year, domestic market consumption does not overly concern us.
State electricity utility, Perusahaan Listrik Negara (PLN), plans to add 10,000 MW of capacity by 2013, but we expect delays. We are more concerned about the rains in Kalimantan, as exports have been below 20mt since September.
Annualised export figures for January-November 2010 totalled 276mt, significantly below McCloskey's forecast of 287.5mt. While exports are unlikely to reach McCloskey's estimate of 308.5mt in 2011, we think 10-15mt y/y growth in Indonesian exports is possible, which would be the highest level among international suppliers.
Asian demand has remained firm in recent months. India, Korea and Japan are picking up the slack from China.'' Preliminary data from the Central Electricity Authority of India showed December power generation holding firm at 57,331 GWH, up 1.4% m/m and 2.6% y/y, marking the second-highest reading in 2010.
This is on the back of continued capacity expansion. Elsewhere, Japan's November steam coal imports stood at 10.7mt, up 5.9% y/y; while South Korea's came in at 7.4mt, up 14.2% y/y. Utilities across Asia (except China) are reported to have sought alternative sources of coal because of the disruption in Australia. This has provided additional price support.
Too early to gauge China's 2011 demand picture.
Import demand should be robust, despite being uncertain. While prospects for demand in India, Korea and Japan are good, most market attention is focused on developments in China. From January to September 2010, monthly steam coal imports from China averaged 7.73mt. In October, these dropped to 6.4mt and rebounded to 7.6mt in November. We have long argued that China is a very opportunistic buyer and its imports are heavily influenced by the differential between domestic and international prices.
This relationship held throughout 2010 and we believe that it will continue to do so. Suppliers and Chinese buyers are currently reselling coal to other Asian buyers at a price of USD 142/t FOB, 5,800 kcal basis, taking advantage of the rare arbitrage window present.
With international prices supported by supply-side factors, such an arbitrage window could remain open (provided China has extra coal) for several weeks and Chinese imports are likely to remain muted near-term, in our view.
McCloskey has upgraded its previously low import estimates for China, and now expects 112mt of imports for 2011. We think this figure is likely to be subject to substantial revision as the year goes on, as it is still early into 2011 and, more importantly, trade requirements hinge on local production and relative pricing.
However, a high level (100mt plus) of Chinese imports is likely to be a persistent feature of global thermal coal trade, given China's substantial energy requirements.
Summary
Tighter fundamentals warrant higher prices, but 2Q setback expected With supply disruptions occurring in almost every major exporting country, and a number of Asian buyers reportedly looking for prompt replacement tonnage, fundamentals have clearly tightened since November 2010. Near-term, risks are biased towards the upside as further supply losses would spark another rally.
That said, we highlight the risk of a setback in Q2-2011 as seasonal demand fades.
With weather in Indonesia still unpredictable, flood effects possibly unwinding in 2H2011, and prospects in China unclear, 2011 is likely to be a volatile year.
A repeat of 2008? We think it is unlikely.
It is tempting to compare the recent price rally with the impressive run we saw in 2008. We think there are similarities, but there is unlikely to be a repeat, and prices will probably not break the highs reached in mid-2008. As we have discussed, Chinese import demand is still uncertain, as is Indonesian supply.
Assuming more normal weather patterns, supply should be able to normalise in 2H2011, bringing prices down to USD 120-130/t for Newcastle on an FOB basis.
Another important point is the potential substitution effect, if global steam coal prices continue to rally. Newcastle FOB prices rallied about 34% in Q4-2010, while crude and natural gas prices were relatively contained, with a 12% increase during the same period. With coal being the outperformer within the energy complex, we have a much wider scope for substitution that could contain coal price rallies.
It said on Saturday, Jan 15 the impressive run in coal markets resembles 2008 but is unlikely to breach its previous high, adding that it was 'bullish short-term, but highlight the risk of setbacks in 2Q as seasonal demand fades'.
StanChart Research said it had on Nov 18, 2010 it had issued a report where it had forecast US$116 per tonne (t) for Newcastle coal, free-on-board (FOB) basis, based on a global deficit of 4.8 million tonnes (mt) before the full impact of floods in Australia, in terms of supply disruption, had been factored in.
'The floods, which initially started in September, escalated in December, and ongoing bad weather in Australia, Colombia and Indonesia has put pressure on global supply and we now believe there are significant downside risks to supply for 2011.
'We are therefore upgrading our full-year 2011 forecasts to US$114 per tonne, US$115 and US$126, respectively, for API4 FOB, API2 CIF and Newcastle FOB,' it said.
(The API 2 index is the international price benchmark for coal imported to northwestern Europe. The API 4 index is the international price benchmark for coal exported from the Richards Bay terminal in South Africa).
The research house said its upgrade was partly based on supply disruptions, but also on firm demand, mainly from India and South Korea.
It said it was bullish short-term as it did not expect weather-related disruption to ease any time soon, but it remained cautious about 2Q, when seasonal demand should fade.
Below is the research report issued by StanChart Global Research
Australian floods in the headlines
Output to stay below pre-flood levels for at least another three months. The worst floods in 50 years in Queensland, Australia, have dominated the headlines since they escalated in early December. They have prompted force majeure declarations from a number of producers.
The scale and duration of the floods was uncertain when they began in September, but continuous rains have brought exports to a complete halt in Queensland and global coal prices have soared as a result.
Coking coal prices surged first, but thermal coal prices are also benefiting from the knock-on effect as competition with higher-valued coking coal for railcar access has intensified.
In our view, Australian supplies face further downside risk as floods have washed away key rail and road links. A Reuters survey also showed that market analysts expect it to take at least three months for output to recover to pre-flood levels. We therefore expect Newcastle FOB prices to trade in the US$130-US$150 a tonne range in January and early February, before seasonal demand begins to fade in March.
Issues in Colombia and South Africa complicate matters: Bad weather also affects Colombia but the global impact is small Severe rains across Colombia, also attributed to the La Ni''a phenomenon, have caused damage to infrastructure that has slowed coal mining and transport.
The government meteorological bureau has forecast the rains to last until March, and possibly even until May. We therefore expect Colombia's export growth to be subdued this year.
South Africa could export more but with little effect on global balance South Africa is also experiencing heavy rainfall. To date, this has not had a direct impact on its exports, but the slowdown in rail transport has reduced stocks to very low levels in the Richards Bay Coal Terminal.
We believe South Africa can improve exports further, to the 65-70mt level, from 2010's 63.43mt, but this will not be enough to relieve pressure on the global demand-supply balance.
Indonesia is an important wild-card.
Dominates competitors in terms of supply growth ' weather is key.
While we expect more downside to Australian supply and we do not think Colombia and South Africa can cover the lost tonnage, Indonesia will be as important as Australia in driving the global supply and demand balance this year. Despite industry consultant McCloskey's expectation that 80mt of Indonesia's output will go to local markets in 2011, compared with 64mt last year, domestic market consumption does not overly concern us.
State electricity utility, Perusahaan Listrik Negara (PLN), plans to add 10,000 MW of capacity by 2013, but we expect delays. We are more concerned about the rains in Kalimantan, as exports have been below 20mt since September.
Annualised export figures for January-November 2010 totalled 276mt, significantly below McCloskey's forecast of 287.5mt. While exports are unlikely to reach McCloskey's estimate of 308.5mt in 2011, we think 10-15mt y/y growth in Indonesian exports is possible, which would be the highest level among international suppliers.
Asian demand has remained firm in recent months. India, Korea and Japan are picking up the slack from China.'' Preliminary data from the Central Electricity Authority of India showed December power generation holding firm at 57,331 GWH, up 1.4% m/m and 2.6% y/y, marking the second-highest reading in 2010.
This is on the back of continued capacity expansion. Elsewhere, Japan's November steam coal imports stood at 10.7mt, up 5.9% y/y; while South Korea's came in at 7.4mt, up 14.2% y/y. Utilities across Asia (except China) are reported to have sought alternative sources of coal because of the disruption in Australia. This has provided additional price support.
Too early to gauge China's 2011 demand picture.
Import demand should be robust, despite being uncertain. While prospects for demand in India, Korea and Japan are good, most market attention is focused on developments in China. From January to September 2010, monthly steam coal imports from China averaged 7.73mt. In October, these dropped to 6.4mt and rebounded to 7.6mt in November. We have long argued that China is a very opportunistic buyer and its imports are heavily influenced by the differential between domestic and international prices.
This relationship held throughout 2010 and we believe that it will continue to do so. Suppliers and Chinese buyers are currently reselling coal to other Asian buyers at a price of USD 142/t FOB, 5,800 kcal basis, taking advantage of the rare arbitrage window present.
With international prices supported by supply-side factors, such an arbitrage window could remain open (provided China has extra coal) for several weeks and Chinese imports are likely to remain muted near-term, in our view.
McCloskey has upgraded its previously low import estimates for China, and now expects 112mt of imports for 2011. We think this figure is likely to be subject to substantial revision as the year goes on, as it is still early into 2011 and, more importantly, trade requirements hinge on local production and relative pricing.
However, a high level (100mt plus) of Chinese imports is likely to be a persistent feature of global thermal coal trade, given China's substantial energy requirements.
Summary
Tighter fundamentals warrant higher prices, but 2Q setback expected With supply disruptions occurring in almost every major exporting country, and a number of Asian buyers reportedly looking for prompt replacement tonnage, fundamentals have clearly tightened since November 2010. Near-term, risks are biased towards the upside as further supply losses would spark another rally.
That said, we highlight the risk of a setback in Q2-2011 as seasonal demand fades.
With weather in Indonesia still unpredictable, flood effects possibly unwinding in 2H2011, and prospects in China unclear, 2011 is likely to be a volatile year.
A repeat of 2008? We think it is unlikely.
It is tempting to compare the recent price rally with the impressive run we saw in 2008. We think there are similarities, but there is unlikely to be a repeat, and prices will probably not break the highs reached in mid-2008. As we have discussed, Chinese import demand is still uncertain, as is Indonesian supply.
Assuming more normal weather patterns, supply should be able to normalise in 2H2011, bringing prices down to USD 120-130/t for Newcastle on an FOB basis.
Another important point is the potential substitution effect, if global steam coal prices continue to rally. Newcastle FOB prices rallied about 34% in Q4-2010, while crude and natural gas prices were relatively contained, with a 12% increase during the same period. With coal being the outperformer within the energy complex, we have a much wider scope for substitution that could contain coal price rallies.
I would like to say thanks, for given informative blog post about Keep up the fantastic Steam coal prices 2012... Keep up the fantastic work!
ReplyDelete