Coal Imports by China May Fall as Discount Narrows by 47%: Energy Markets

China, which became a net coal importer in 2009, may cut overseas purchases after the discount on shipments from South Africa compared with domestic supplies narrowed 47 percent in a year.

The world’s fastest-growing economy bought 126 million tons from overseas last year as demand from steelmakers and power producers soared, according to Chinese customs data. Now, power use is declining and the government has imposed price caps on local mines. China may require fewer shipments, threatening this year’s 33 percent jump in spot prices at the port of Qinhuangdao.

The discount on coal from South Africa’s Richards Bay, the world’s second-biggest exporting harbor, and Chinese supplies has narrowed to $19 a ton before shipping costs are taken into account, government data show. That compares with $36 a ton less than a year ago.

“China right now looks to be more bearish than bullish,” Richard Morse, who leads coal-market research at Stanford University at Stanford, California, said in an interview. “Lower domestic prices are bearish for imports.”

The spot price for coal at Qinhuangdao, China’s biggest port for the fuel, was $111.48 a ton as of June 28, compared with $83.79 a year earlier, according to the China Coal Transport and Distribution Association. Prices averaged $109.26 a ton in 2009. Coal at Richards Bay was $91.51 on June 25, compared with an average of $73.10 last year, according to an index compiled by IHS McCloskey.

Inventories carried by Chinese utilities rose to the equivalent of 18 days of consumption compared with seven days two months earlier, Australia and New Zealand Banking Group Ltd. said in an e-mailed note.

Shipping Rates

A slide in imports is likely to hurt producers in South Africa, Colombia, the U.S. and Canada, which boosted sales of thermal and steelmaking coal to Asia just as the global recession curbed demand elsewhere. The four countries accounted for 11 percent of China’s supplies in the five months through May, compared with 3.7 percent in 2009.

Benchmark European coal derivatives fell the most in more than a week on July 2, with prices for delivery to Amsterdam, Rotterdam or Antwerp with settlement next year falling 2.2 percent to $99 a ton. Prices at Australia’s Newcastle, the world’s largest export harbor for the fuel, dropped 3.1 percent to $97.31 in the week to June 25.

The slowdown in China’s imports may also deepen the slump in shipping rates. The Baltic Dry Index, a gauge of commodity- transport prices, fell for a 26th day on July 2, extending its longest slide since August 2005, data from the Baltic Exchange in London showed.

To help curb inflation, China’s National Development and Reform Commission ordered coal companies on June 25 to refrain from spot-price increases and forbade them from amending agreements on annual supply contracts with power producers. Consumer prices rose 3.1 percent in May from a year earlier, exceeding the government’s 3 percent target average for 2010.

‘Risk of Losses’

“The new controls appear designed to manage inflationary expectations and to discourage coalminers from exacting higher- than-contracted prices from power producers that stand at risk of incurring losses this year,” said Jing Ulrich, chairwoman for China equities and commodities at JPMorgan Chase & Co. in Hong Kong.

China’s efforts to keep the economy from overheating may be working. The U.S. Conference Board last week revised its leading economic index for China to show the smallest gain in five months in April. Goldman Sachs Group Inc. cut its 2010 growth forecast to 10.1 percent from 11.4 percent.

The economy expanded 10.7 percent in 2009. It will grow 9.25 percent this year, according to the median in a Bloomberg survey of 14 economists.

“The main impact on China’s import demand is still the macroeconomic outlook,” said David Fang, a director at the China Coal Transport and Distribution Association in Beijing. “Domestic coal prices may decline after September, after the summer peak season.”

Colombia and South Africa supplied a combined 3.8 million metric tons of coal to China in the first five months of the year, compared with zero a year earlier, according to Chinese customs data. The U.S. and Canada shipped 3.77 million tons in the period, up from 1.22 million tons.

“Lower prices paid in the annual contracts will have some impact on China’s imports,” Fang said.

--Dinakar Sethuraman in Singapore and Chua Baizhen in Beijing. Editors: Clyde Russell, Ang Bee Lin.

To contact the reporters on this story: Dinakar Sethuraman in Singapore at dinakar@bloomberg.net; Baizhen Chua in Beijing at bchua14@bloomberg.net

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