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  • COALspot.com's self assessment - Indonesian 5800 GAR coal (Physical) market direction: WEAK (last updated : 22 July 2014)
  • Ministry of Energy of Indonesia has revised DOWN JULY 2014 Coal Price Reference to US$ 72.45 per ton (Last Update: 7/7/14)
  • SGX AsiaClear OTC FOB Sub-Bit Indonesia Coal Q3 2014 (Contract) Avg DSP - US$ 54.00 (+0.15% dod) 25 July 2014 (8pm SG time) - SGX
  • SGX AsiaClear OTC FOB Sub-Bit Indonesia Coal Q4 2014 (Contract) Avg DSP - US$ 54.70 (-0.03% dod) 25 July 2014(8pm SG time) - SGX
  • Nishat Group of Pakistan plans to convert its two oil-fired IPPS with a cumulative capacity of 727 MW on coal - The News
  • Indonesian Miners are eligible for a lower tariff for the concentrate export tax, If they pay a bond as a guarantee to build a smelter later - Media
  • The Sarolangun administration in Jambi,Indonesia has suspended the operations of 10 coal mining companies effective as of July 21 - JP
  • Small coal power plants to be set up in Punjab:Shahbaz - AP
  • TNEB India has asked Ennore Port to increase its coal handling capacity to 34 Mmt in the next Five years - Meida
  • Chinese coal producers had 99 Mmt of unsold coal; key thermal power plants had 79.06 Mmt of coal inventories - NDRC
  • Korea Southern Power Co Ltd is seeking 148k tonnes of 4700 NAR coal for Oct - Nov 2014
  • The steel-making coal market needs to cut another 10 million tons of production to get into balance - Teck Resources Ltd
  • Australia approves Adani's A$16.5 bln Carmichael coal project - Reuters

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Wednesday, 13 June 12
LOW COAL PRICES COULD CHANGE SUPPLY SIDE DYNAMICS - FITCH RATINGS


Fitch Ratings believes that the weakness seen in thermal coal prices in recent months should reverse once demand from major importers recovers, although there is a risk low prices may persist into 2013, changing the industry's supply side dynamics.

The price of thermal coal (5,500 kcal coal at Newcastle Australia on a free-on-board basis) reached a two-year low of USD87 per metric ton in early June 2012, down from USD142/mt in January 2011. Major reasons for this decline include China's economic slowdown and high coal inventory levels, increased production and exports from Indonesia and Australia, and increased exports by US coal producers due to cheap natural gas displacing coal used in US power generation.

Fitch believes that prices can recover from current lows once demand from key importers - China and India - improves, and the supply side adjusts to reflect the price environment.  India depends on coal as its major energy source and is increasingly relying on imported coal as it struggles to increase domestic production. Likewise in China, thermal coal fired power represents more than 70% of the country's energy needs; Fitch believes thermal coal demand from China will lift again post sufficient policy easing by the government, and continue rising over the medium-to-long term in line with the country's strong GDP growth outlook, albeit lower than previous years.

The weak pricing environment is exposing the business risks of high-cost coal producers, as coal prices fall near or below the marginal cost of production. Many Australian producers have high cash costs of production; such operators will be significantly affected if prices remain low for an extended period. At the same time, sustained low coal prices can shift buyers from low-rank coal to higher-grade coals and thus negatively affect both demand and realized prices for low-rank coal.

Fitch notes that many large coal producers have contracts in place with both volumes and prices fixed, typically for a period of one year; such contracts can account for a meaningful share of their total revenues - for example around 65% for Adaro Indonesia ('BB+'/Stable) and around 45% PT Indika Energy ('B+'/Positive). These operators would be insulated from a temporary weakening of coal prices to some extent. However, should low prices persist through 2012 and into 2013, it will negatively affect the prices they negotiate for 2013; such negotiations typically take place in Q4 and Q1 of each calendar year.

Should the current low price environment persist into 2013, Fitch expects high-cost producers in Australia and the US to undertake production cuts, and review expansion projects under consideration. Fitch also believes that production expansion plans by low-cost producing countries like Indonesia may be curtailed.  Such actions would limit coal production levels (or growth) and help address oversupply.

In rating companies producing commodities, like coal, Fitch takes a through-the-cycle approach to its ratings; this factors in a reasonable level of rating headroom to accommodate weakening of coal prices. Cash cost of production and cash margins over an industry cycle are given a heavy emphasis and factored into the ratings. Hence, Fitch does not expect any immediate negative rating actions on its rated coal producers in the Asia-Pacific region. 
Source: Fitch Ratings


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