KEY POINTS:
Coal prices are likely to remain strong next year, close to this year's average levels, because there are many supply uncertainties despite the emergence of the United States as a major exporter.
Coal prices surged to record highs this year after a shift from historically abundant supply to
tightness due to a leap in Chinese demand, which prompted a cut in itsexports.
The consensus in the coal market is that next year may see a small dip in prices but, from 2009 to 2015, the trend will be upward.
"The general feeling is that the market is going to remain strong," said Jim Lennon, an analyst at Macquarie Bank.
Deck Slone, vice-president investor relations and public affairs at US producer Arch Coal said: "Certainly we believe the world market will remain extraordinarily tight into 2008."
Coal industry members who recently attended a closed-door industry event in Stockholm concluded that there would be a small surplus of around 10 million tonnes next year, which would cause a price dip in the second half.
Global supply would rise by about 35 million tonnes in 2008: 5 million from Australia, 15 million from Indonesia, 4 million from Colombia, 2 million from South Africa and 8 million from the United States, Stockholm delegates said.
New Zealand's Pyke River Coal will come into production next year and hopes to export around one million tonnes of hard coking coal for the next 18 years.
But producers, traders and consumers said that despite the slightly bearish supply/demand calculations on paper, if just some of the numerous supply problems seen this year were repeated next year, the 10 million surplus could easily swing into deficit.
Huge queues at Australia's Newcastle port, lack of Russian rail cars, Russian and South African port problems, doubtful US rail capacity and weather-related shipping problems all combined this year to cutsupply and help to boost prices.
"What I don't see is where there is a clear source anywhere of spot coal, in quantity, for 2008," one European utility said.
Russian exporters said it would take them until June next year to catch up with delayed shipments due to logistical problems - lack of rail cars and port disruptions.
Indonesian producers said shipments would be vulnerable to heavy rains during the next few months. This year late rains in January led to a spate of force majeure declarations.
Australian shipments were delayed and restricted throughout the year due to queues at Newcastle port. The reintroduction of quotas for port access is not expected to resolve the problem.
Around 20 million tonnes of US coal had been sold for 2008 shipment to Europe, US coal analyst Jim Thompson said.
The 8 million tonnes projected at the Stockholm meeting was a cautious under-estimate, other industry sources said.
But some buyers are not convinced this mostly high-sulphur coal is the solution to tight supply.
"The US is a new source for Europe and this figure of 20 million tonnes keeps being talked about," one source said. "But how much of it will actually be shipped here and how many of the sellers really do have the port and rail capacity needed?"
If US coal was going to continue to be exported, prices had to stay at least US$50 ($67.13) a short ton free-on-rail at the mine, Thompson said.
"The supply situation isn't getting any better around the world. There are challenges in virtually every exporting country," he said.
China was a net importer of coal for much of this year. China's National Development and Reform Commission said this month that the country would remain a net importer next year.
"The difference this year from 2004's brief bull run is that it's all been driven by fundamentals - there's been an actual shortage of coal in some areas, or some origins. That's what's pushed prices up to record highs - 2004 was all about sentiment," one Indonesian producer said.
Free-on-board and CIF coal prices climbed steadily through 2007 to reach record highs in September/October.
The high for CIF ARA prices was US$130 a tonne in October. South African prices hit a record US$104.75 a tonne FOB in November. Australian coal hit a record US$100.25 a tonne FOB Newcastle also in November.
"For South African coal free-on-board Richards Bay we'd see prices in a wide range of US$85-$100 a tonne next year, and similar for Newcastle coal. "We see them firmly entrenched in that range, much the same as these past several months," Macquarie's Lennon said.
Forecasts for CIF ARA coal delivered into Europe were around US$115 to US$125 a tonne, and usually included the caveat that delivered prices would be largely dependent upon freight rates.
Strikes for higher pay were more likely now as unions were aware of mining firms' record margins, industry sources said.
"We're beginning to see labour-related pressures," Arch's Deck Slone said.
South Africa's industry is heavily unionised but coal strikes have been few andbrief.
Drummond Coal had a three-month strike at its Colombia mine in 2006 and new wage talks begin in May next year.
- REUTERS
