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London - Prices for seaborne thermal coal will stay above production costs for larger mines this year, while demand and supply of the fossil fuel will slow because of weaker economic growth and falling US exports, Deutsche Bank said in a report on Tuesday.
Prices for Australian and South African coal benchmarks will be largely unchanged this year as a forecast 3% growth in demand for seaborne coal, driven mainly from China and India, will be met by a corresponding 3% rise in supply, leaving the market short by 19m tonnes, the German bank said.
South African coal delivered into Europe (API 4 FOB Richards Bay) will average $93/tonne this year, unchanged from last year's levels, while Australian exports of coal (Newcastle FOB) are likely to fall to $95 from $97 seen in 2012, meaning most larger producers of coal will still be able to break-even or produce at a profit, the German bank said.
Deutsche Bank estimated costs of production to be around $89-93, but only smaller producers are likely to be loss-making this year as wages and equipment costs stabilise and demand from fast-growing developing economies is likely to underpin the market, the report added.
"There is no single explanation for higher demand. In India, it is a perennial shortage of fuel for power generation amidst a slowly improving price tariff environment," Deutsche Bank coal analyst Michael Hsueh told Reuters.
"In China, [higher demand] is primarily driven by the need to fill in the gap between demand and domestic production to whatever degree it is beneficial. We do believe that we are seeing a recovery in China and that it will strengthen throughout the year," he added.
The report said recent economic indicators suggest that China, the world's second-largest economy, could see growth pick up this year at a slightly faster rate compared with 2012, when the pace of expansion slowed and prompted the cancellation of some orders for coal and the build-up of big stockpiles.
"We can already observe that the year-on-year (y/y) growth in Chinese power demand has picked up in October and November 2012 to 7.1% and 8.0% respectively," it added.
Moreover, demand for coal in the US, the world's second biggest consumer, could pick up slightly this year because gas prices are forecast to be higher, Deutsche Bank said.
This would mean more production will be consumed domestically by utilities and less exported to Europe, where cheap US coal has prompted utilities to burn more of the fuel in power stations in 2012.
"As we forecast that US gas prices will average $3.75/mmBtu in 2013, and then carry on rising through 2015 in our forecasts to $4.00/mmBtu and $4.25/mmBtu, we expect that coal demand in the US will recover further in the next year."
Despite some shutdowns of older mines in the US and smaller operations in Indonesia, mainly because of rising production costs and a 20% y/y fall in coal prices, global supply rose 7% in 2012 while demand grew 8% in 2012, Deutsche estimated.
In a separate report on Tuesday Deutsche said a steady decline in European coal prices that has coincided with a tight gas market means that coal prices would have to rise by almost $80 per tonne in order to restore competitiveness to gas for power generation.
