Coal's China-Australia Discount at 8-Month High on Floods: Energy Markets
Chinese coal for generating power is at its cheapest in eight months relative to Australia’s after the government in Beijing froze prices to curb inflation and the worst flooding in Queensland since 1974 disrupted imports.
Fuel shipped from Qinhuangdao to China’s south, where demand is greatest, cost $22.90 a metric ton less than deliveries from Newcastle, Australia, on Dec. 31, according to Andrew Driscoll, head of resources research at CLSA Asia-Pacific Markets. That’s the biggest discount since the end of April. Qinhuangdao shipments were an average $14.80 cheaper than Newcastle’s in the five years through 2010, CLSA data showed.
Flooding in Australia, the world’s biggest coal exporter, drove Newcastle prices to the highest this month in more than two years. At the same time, China, the largest coal consumer, is stepping up efforts to control inflation as its economy grows faster than all of its major peers. The National Development and Reform Commission, the country’s top economic planning agency, ordered contract-supply prices for coal to be kept unchanged this year from 2010, according to a Dec. 10 statement.
“Chinese supply is quite ample and the government wants to stabilize prices,” David Fang, a director at the China Coal Transport and Distribution Association, said by telephone from Beijing. “The price difference between China and Australian coal may widen a little further because Chinese prices should remain stable at around current levels.”
Benchmark prices for Chinese power-station coal were little changed at $117 a ton yesterday, after falling for four straight weeks to as low as $116 a ton, according to data from the China Coal Transport and Distribution Association. Coal from Newcastle rose for a seventh week, climbing to $138.50 a ton on Jan. 14, the highest since September 2008, according to data from Petersfield, England-based IHS McCloskey.
Australia may have lost about 1.5 million tons of power- station-coal output because of the floods, according to data from Macquarie Group Ltd. The northeastern state of Queensland, where an area the size of France and Germany combined was inundated, exports about 50 million tons of the fuel annually, according to Macquarie.
“You shouldn’t expect too much normality until well into February,” Michael Roche, chief executive officer of the Queensland Resources Council, said in an interview on Jan. 10. “You’ve got to expect that clearing water from flooded pits will go into next month.”
Dip in Imports
As prices rise, China may cut imports, according to Helen Lau, an analyst at UOB-Kay Hian Ltd. in Hong Kong. Coal may reach $150 a ton in “coming weeks,” Joachim Azria, an analyst at Credit Suisse Group AG in New York, said in a Jan. 10 report. Newcastle prices may exceed $197 a ton after rainfall intensified in Australia’s Queensland, Edinburgh, U.K.-based consultant Wood Mackenzie Ltd. said in a Jan. 14 report.
“The impact of narrowed arbitrage profit and reduced Australian exports may lead February imports to dip” to 13 million tons, the lowest since October, Lau said on Jan. 10.
China’s imports may still reach 15 million tons in January, reflecting shipments that were booked for this month before the floods, Lau said. The nation, which uses coal for 70 percent of its power generation, bought an average of 13.5 million tons a month from January to November 2010, according to the Beijing- based General Administration of Customs. About 3 million tons, a fifth of all shipments, came from Australia, the data show.
An economy growing almost three times faster than the U.S. is driving Chinese coal demand. Thermal-power output capacity may rise by 80,000 megawatts this year, the official Xinhua News Agency said on Jan. 7. Total generation capacity reached 950,000 megawatts in 2010, Sina.com cited Zhang Ping, head of the National Development and Reform Commission, as saying on Jan. 6.
‘Appetite for Coal’
China’s economy may expand 9.1 percent this year, according to the median estimate of 18 economists surveyed by Bloomberg. U.S. gross domestic product may grow 3.1 percent, while the euro region’s increases 1.5 percent, according to Bloomberg surveys.
“China will still have the appetite for imported coal,” Lau said. “They will keep their import momentum high because southern and eastern China needs to import for logistical reasons.” Overseas purchases may reach 210 million tons this year, 30 percent higher than in 2010, she said.
Exports from Australia may recover in March after water is pumped from mines and railroads are repaired, while a poor weather outlook remains a risk to Queensland shipments, Bank of America Merrill Lynch analysts led by Sydney-based Alex Tonks wrote in a research note on Jan. 11.
QR National Ltd., an Australian rail operator, said the Blackwater rail network that feeds into the export port of Gladstone may open this week. Macarthur Coal Ltd. resumed some mining, with normal production scheduled to resume in a month provided there’s no “further big rain,” Chairman Keith De Lacy said in a Jan. 10 Bloomberg Television interview.
“Qinhuangdao prices are now more competitive to Australia but this is temporary,” Lau said. “Australian prices won’t go higher forever.”
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