No Bottom in Sight for China Coal Prices: Analyst

Coal prices in China have fallen almost 20 percent since the beginning of the year, with analysts expecting further declines as inventories remain high and coal mines in China continue to ramp up production.

A bag of coals picked out from gangue stockpiles at a coal-chosen factory in Chifeng of Inner Mongolia Autonomous Region, China.
China Photos | Getty Images
A bag of coals picked out from gangue stockpiles at a coal-chosen factory in Chifeng of Inner Mongolia Autonomous Region, China.

Spot coal in China, which is currently trading around 650 yuan ($102.40) a tonne could fall a further 8 percent this quarter, according to Nomura Research.

“It is too early to call a bottom in coal prices given that domestic supply cutbacks are inadequate and power plants’ coal stockpiles remain high at 28 days versus 15 days in normal times,” Nomura Analyst Ivan Lee said in a report published Tuesday. “Waning coal-fired (electricity) generation, a high influx of cheap coal and excessive stockpiles across China will continue to weigh on the coal market outlook in the second half of 2012.”

According to the report, domestic coal producers are expected to increase production by about 5 percent a year from now until 2015, but the Chinese are continuing to import as well because international coal prices are about 10 percent cheaper than those at home. Imports of the commodity will reach 250 million tonnes this year, up from 182 million tonnes in 2011, according to data from the China Coal Market Network, an industry association.

Andrew Su, CEO of Compass Global Markets, a Sydney-based commodity trading broker, says the oversupply situation in China is getting worse.

“Six to seven months ago, we were getting inquiries from China about buying coal mines in Australia,” Su told CNBC. “Now, people are asking, how can we offload some of our coal capacity because some of our customers are defaulting on their uptake agreements. Shipments are just sitting there.”

According to Lee, coal producers need to cut output. But at 600-630 yuan a tonne, it is still profitable for companies to sell so they are not cutting back.

“The most likely catalyst for price stability and recovery at these levels is a larger cut in output among the highest-cost miners,” Nomura’s Lee said. “Sxcoal (research firm based in China) believes a 3 percent cut in monthly coal production, approximately 10 million tonnes, is needed to restore market balance.”

He adds that the current oversupply situation will lead to a further drop in prices hurting the earnings of China’s three largest listed coal companies, China Shenhua Energy , China Coal Energy and Yanzhou Coal . Nomura is revising its earnings estimates of these three companies as it expects margins to shrink and sales growth to slow over the next two years.

- By CNBC's Jean Chua.