“We have been bearish on thermal coal for some time and the market has, up to now, proved to be more resilient than we had anticipated,” Macquarie analysts said.

 

While noting electricity demand was generally weak, Macquarie said “particularly poor production in Australia”, mine constraints in China and the recent labour issues in Colombia had propped up the commodity, along with a resilient oil price.

 

The analysts are expecting supply from Australia and Colombia to turnaround and have a bearish outlook on oil, but are uncertain about the effect China might have on the Australian thermal coal market.

 

“China dominates both upside and downside risks for thermal coal prices. Positive price catalysts for domestic coal – from recovering electricity demand and continued supply constraints – could keep prices trading above $60/t.

 

“Improved supply and falling domestic prices could result in international price support falling away and thermal coal trading down toward $50/t.”

 

Macquarie analysts identified an arbitrage window as the main supporter of Australian thermal coal, saying Chinese domestic prices are currently at a $7-10/t premium to seaborne thermal coal prices.

 

The analysts said this premium was due to supply constraints in China rather than strong demand.

 

“Constraints on small, unsafe mines are becoming stricter. This will be a longer-term issue for supply expansion in China.”

 

Other short-term constraints identified included a 4.4% year-over-year drop in production from China National Coal Group in the first quarter of 2009, as well as maintenance work on the large DaQin rail line.

 

While having the view that Chinese production and transport volumes will increase through the current quarter, the analysts project Chinese exports will fall by 5 million tonnes for the year (14%).

 

“China is the only significant bullish factor right now, turning the thermal coal outlook from resolutely bearish to more balanced.

 

“However, we remain cautious on the outlook for China and, thus, remain cautious on the outlook for thermal coal.”

 

Although Newcastle spot thermal coal has been stable for the past three weeks at $63/t, South Africa’s spot prices have dropped in the past week.

 

Richards Bay spot thermal coal is back on low ground as the globalCOAL RB index ended at $60.58/t on Friday, down 4.22% from the previous week.

 

The globalCOAL DES ARA index, considered to be South African spot thermal coal prices plus freight, did not fare much better, falling 4.07% to $63.60/t.