ANALYSIS-China domestic coal squabble opens door to imports

Kalimantan Coal

(Repeats a story issued on Tuesday with no changes in text)
By Rujun Shen and Fayen Wong
SHANGHAI/PERTH, Feb 17 (Reuters) – A months-long dispute between Chinese coal miners and power generators over annual prices has unexpectedly opened the door to rising imports, despite lacklustre demand and a supply glut.
Talks on an annual coal price deal for China’s top five power producers — Huaneng, Datang, Guodian, Huadian and China Power Investment Corporation — have dragged on for almost two months without agreement, dissolving recently into a war of words.
The coal miners, led by industry giant Shenhua Group, want to raise prices by over 10 percent from last year, arguing that tax costs have gone up and term prices were anyway always too low.
The power firms firmly oppose a hike from last year’s term price, which analysts put at about 460 yuan ($67.30) per tonne.
In an apparent effort to step up pressure on the miners to agree to lower prices, generators have been buying up more and more coal abroad, lifting total imports last month by 12 percent from December, a second increase after November’s multi-year low.
“We’ve received quite a few orders for imported coal lately,” said a Guangdong-based coal trader. “The psychological impact is more significant than the actual effect. The attitude is: if you don’t sell to us, we will find coal somewhere else.”
The miners have some support from officials, who have backed their call for a 50 yuan rise, and some plants affiliated to Huadian and Guodian may have weakened their stance by cutting a side deal with a small coal mine for about 530 yuan per tonne.
Asking for a price rise as the dust is still clearing on the biggest commodity price collapse in history may not be the coal miners’ best-timed move. Power consumption has declined globally, including in China, and shipping costs have followed suit, so suppliers are going further to compete for less demand.
A price deal is widely expected to come eventually, but until it is struck, traders can try their luck in the world’s biggest coal market. China produced 2.7 billion tonnes of coal last year, three times the amount traded on the global seaborne market.
Making sales won’t be easy. The power firms are not under pressure to import since unwanted coal shipments have piled up at entry ports and China’s power plants themselves held stocks of 36 million tonnes on Feb. 10, or enough supplies for 21 days, said Chen Liang, an analyst at Ping An Securities.
But they are buying nonetheless, with January imports rising to 2.99 million tonnes, despite slower industrial output, the passing of mid-winter and the fact that January had only 16 trading days because of holidays.
To see a graphic of China’s coal trade, please click on: here
“Imports from Vietnam jumped in January, after Vietnam loosened up its policy on coal exports, and now prices are less than half the highest point in the last year,” said the trader in Guangdong, adding that February imports were likely to climb too.
An executive at a large power company in southern China said his firm had imported a lot from Vietnam in January.
“Domestic prices are too high, so power companies want to tender for supply. But overseas supply is still limited and the majority of coal has to be sourced in China,” he said.
A detailed official breakdown of January’s imports will only be available later this month, but December showed an eight-fold surge since 2007 in Australian shipments of non-coking, bituminous coal — the mainstay of thermal power generators, as well as rare imports of coal from the United States
Sellers will have to look hard to find cargoes suitable for China. Indonesian coal should be about $10 per tonne cheaper than Chinese coal, even after accounting for tax and shipping costs, traders said.
But miners there say there is little on offer because almost all production for the first half of this year is locked into supply deals for Japan, South Korea and elsewhere.
“The smaller mines may have some extra supplies and are happy to sell at a cheaper price. But there’s always a risk of these mines not being able to deliver the amounts they have promised,” said a source at a major Indonesian coal producer.
An extended rainy season in the coal-rich Kalimantan region has also cut production. In December Indonesia shipped less than half the bituminous coal to China it did in December 2007.
Australia’s high-grade Newcastle coal, which has won market share as freight rates fell, is also unlikely to go to China.
“There is no way Chinese buyers would be willing to pay market prices for standard Newcastle coal,” said a source at an Australian producer. “They could buy more of the lower-quality material, those with higher ash, sulphur and lower heating value, but there’s plenty of that around at the moment so that won’t affect prices much.”
Prices for Newcastle coal have hovered near $80 a tonne FOB on the globalCOAL electronic index this year, a significant premium to lower-quality coal. So Chinese buyers are accepting grades normally sold to steelmakers, such as semi-soft coking coal and pulverised coal injection (PCI) coal.
These burn less easily than their normal supply, but can be mixed in to create a suitable fuel. Traders in Australia said several producers had sold some off-specification thermal coal to Chinese utilities at about $70 a tonne FOB.
“Chinese buyers are only concerned about costs. Quality is secondary and they really wouldn’t pay much more than $70 a tonne for Australian coal, so the off-spec thermal coal is probably the only material they can get,” said a Sydney based trader. ($1=6.835 Yuan) (Writing by Tom Miles; Editing by Clarence Fernandez)

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