China's imports of thermal coal could contract in 2013 as demand growth in the seaborne market is expected to moderate to 2% over the next four years, Goldman Sachs warned in a research note on Friday.
"We believe 2013 will represent a watershed event for the seaborne market because we expect import volumes to China to contract year on year for the first time since the global financial crisis in 2007-2008," said Australia-based Goldman Sachs commodities analyst Christian Lelong.
Demand from China, the largest importer of thermal coal, has lifted growth in the seaborne market to an average annual rate of 7.2% over the five-year period to 2012, Lelong said.
China switched from being a net coal exporter with a surplus of 29 million mt in 2007 to a net importer with a deficit of 139 million mt last year, he said.
India's coal demand is expected to stay positive over the next few years, but demand from Western markets including Europe are expected to continue on their downward trend, he added.
As a result Goldman Sachs lowered its four-year forecast for Newcastle 6,000 kcal/kg NAR thermal coal prices, saying that the price ceiling for thermal coal imported into China had fallen.
"On that basis, we still see upside to the thermal coal price, but we downgrade our 2013 forecast to $93/mt [FOB Newcastle], down 6% and our 2014-17 forecasts to $95/mt, down 5%," Lelong said.
Goldman Sachs said it expected Newcastle thermal coal to continue to trade in a narrow range of $90-95/mt FOB 6,000 kcal/kg NAR basis for the next four years, after trading below $90/mt for most of the second half of 2012.
Spot prices of Newcastle coal were likely to be constrained by Australian mine production and shipping costs, and by Chinese domestic thermal coal prices, the investment bank said in its note.
It stressed that seaborne supply could not be maintained from Australia if Newcastle thermal coal prices remained below the cost of production and shipment, which Lelong put at circa $90/mt FOB.
Production costs for Chinese miners have fallen on lower domestic consumption, excess production capacity, mechanization and improved rail transportation, Goldman Sachs said. Added to this, electricity demand in China was now growing at less than its economic or GDP growth rate.
"The domestic market is likely to remain well supplied as a result of slower demand growth combined with excess production capacity," Lelong said. "Given the linkage between the domestic and seaborne markets, we expect this subdued outlook for Chinese coal will also weigh on import volumes and seaborne prices," he added.
REACTION FROM CHINESE TRADERS MIXED
Some Chinese market sources agreed with the report.
"China's thermal coal imports look set to drop year on year," a Fujian-based trader said, adding that domestic prices could drop below Yuan 513 ($82/mt) excluding VAT over the next couple of months.
A Beijing-based coal trader, however, expressed skepticism about the Goldman Sachs report's main finding that China's imports could be lower this year compared with 2012.
"Coal imports in 2013 will easily exceed last year's," he said, adding that China had already imported 80 million mt of coal in the first quarter of this year, which is 30% higher from a year ago.
"More imports will further push down domestic coal prices in China, and give even smaller room for traders to profit," the trader in Beijing said.
