Power Coal Surplus to Remain Amid Insufficient Cuts, Citi Says

The thermal coal market will remain in surplus next year as producers fail to cut shipments in response to the glut and Chinese inventories of the power-station fuel increase, according to Citigroup Inc.

“The fundamental oversupply in the market will push prices back lower in 2014, particularly as we move beyond the beginning of the year,” the bank said, forecasting coal at Australia’s Newcastle port, the Asian benchmark, will average $79 a metric ton next year.

Citigroup maintained its forecast for Newcastle coal to average $85 a ton in 2015. The bank increased its estimate for the first quarter of next year by 2.5 percent to $82. The fuel has averaged $85.26 this year, according to data from globalCOAL.

Supply reductions have been muted in Australia, the world’s second biggest exporter, because producers are locked into long-term rail freight and port deals, which are required to finance the export infrastructure, Citigroup said. Under the agreements known as take-or-pay contracts, suppliers must pay a fee regardless of whether the coal is shipped. Producers from Australia to the U.S. have cut workers and shelved projects as slumping prices and escalating costs reduce profits.

Coal inventories in China, the world’s biggest energy user, have climbed at mines, ports and power plants, and demand is projected to weaken as tighter credit conditions slow industrial growth, Citigroup said.

To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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