(ChinaCoalResource, Sept 28, 2006) World metallurgical coal prices are expected to fall when the next round of negotiations take place for the contract year beginning April 2007, while thermal coal prices are likely to rise, Citiigroup global commodity analyst Alan Heap forecast.

Speaking to a coal industry conference in Sydney, the analyst said weakening demand and rising supply of metallurgical or coking coal will weigh on these prices.

Heap said the global supply and demand balance for coking coal, used in steel making, is expected to see supply steadily rise to a peak in 2008 and fall back to a small surplus in 2009.

Despite this, he said steel demand and supply in China is expected to continue growing, with a forecast 407 mln metric tons of steel output in 2006 seen rising to 470 mln tons in 2008.

Heap said China is likely to have flat exports of coking coal this year because of China's rising demand for domestic steel supply, as well as an increased supply of coking coal from Mongolia.

The analyst said India's imports of coking coal are expected to steadily rise out to 2009, but this will depend on whether domestic technologies are further developed to utilize 'poorer-quality' types of domestic coking coal.

Heap said thermal coal prices will be underpinned by stronger demand and ongoing supply constraints in prices.

'Our expectation is we'll see another increase in thermal coal prices when the next round of negotiations take place,' he said.

Beyond the next contract year, prices are forecast to ease as supply from Australia increases due to easing infrastructure constraints, a slowing in the rate of growth of the robust Chinese economy and lower demand resulting from the beginning of the Phase 2 European carbon trading scheme.

Heap forecast that Australian exports of thermal coal are likely to continue to experience infrastructure bottlenecks until at least 2008, easing 'quite dramatically' thereafter.

He said thermal coal exports from South Africa are expected to continue falling as capital investment is lacking in areas such as rail infrastructure.

Indonesia's thermal coal exports are likely to rise, with any potential increase in domestic use constrained by the coal being situated in the country's outlying regions such as Kalimantan from it is easier to export than supply the domestic market, Heap said.

Heap noted China's domestic energy market is critical to world prices ahead given 'the spectre for thermal coal imports into China is certainly there.'

He noted China's thermal coal resources are located in the far west of the country and have not had the same amount of development as the nation's metallurgical coal resources, which are situated in the industrialized eastern provinces.

Heap said China's demand of thermal coal is certain to grow given that 160 gigawatts (GW) of extra energy supply is planned for this year and next, lifting the country's capacity to 660 GW by the end of 2007.

He said India is also likely to experience greater imports of thermal coal given the poor quality of its domestic supplies and the country's low level of infrastructure expenditure for developing its thermal coal resources.

Meanwhile, Heap said the short-term restrictions on rising thermal coal prices are unlikely to continue.

These include the previously released inventories held by utilities which weighed on world thermal coal prices, as well as an easing in the recent strength of shipments from Indonesia's supplies.
source:ChinaCoalResource