Citigroup global commodities strategy - Thermal Coal

Thermal Coal

Short-Term Risk Building — International seaborne thermal coal prices have been stable over the last two months (Figure 1). However we see downside risks mounting in the short term.

Chinese Imports — We believe robust Chinese imports of thermal coal (Q1 imports up 20% yoy) over the last 6 months could abate in H209. Chinese domestic coal prices are at artificially high levels (above seaborne prices) as negotiations between large IPPs and coal companies drag on, resulting in higher imports. Domestic Chinese coal supply could improve in H209 with resumption of closed production and the ramp-up of new capacity (NDRC estimates a capacity increase of 215mt in 2009). Chinese demand is still subdued with risks building of an over supplied domestic market, falling prices and weaker imports.

Chinese Exports — Q1 Chinese coal exports declined 27% yoy on last year. Export quotas for 2009 have been issued for 26Mt. Assuming these cover the first half, this implies thermal coal exports of 45Mt (vs. annualised YTD of exports ~30mt). Given the slowdown in power consumption growth thermal coal export licenses have potential to increase, a further risk to seaborne coal prices. We retain our forecasts of rollover at $US70/t for JFY10.