ANZ said assuming the current growth rate in steelmaking capacity in China, India and Brazil sloeds and infrastructure bottlenecks were corrected on time, the coal market would remain tight for at least the next two years.

ANZ’s price forecast for the 2005-06 Japanese financial year (JFY) remained unchanged at $US125 per tonne (up 112%), but it upgraded its forecasts for JFY 2006-07 to $US119/t (down 5%) and JFY 2007-08 to $US95/t (down 20%).

“Supply constraints and lower exports from China have created a chronic tightness in the coal markets that won’t disappear soon. For coking coal, the demand outlook remains strong and we therefore don’t expect prices to fall too much from their current levels,” ANZ said.

“Supply side disruptions from Australia, such as Anglo’s Moranbah coal mine (where production in 2004 fell to 1.3 million tonnes versus a capacity of 3.6Mt) plus the underperformance of Oaky Creek have seen supply growth constrained.”

ANZ said the flow-through into international markets from port expansion plans wouldn’t be felt until 2007.

Weak Chinese coal exports have also played a role in the tight market. The country became a net importer in 2004 after a massive surge in steel production in 2003.

“Chinese net imports of hard coking coal will escalate through to 2006 and China’s impact on traded coking coal demand and prices will only become more significant. We forecast Chinese exports will remain relatively flat at around 10Mt in 2005, while imports are expected to increase by over 40% to 9Mt.”

India and Brazil, along with developing countries like Turkey and Ukraine, were identified as key drivers of demand. By 2007 it is anticipated India will import around 23Mt, up over 50% on 2003. Brazilian imports should increase by 5Mt over the next three years as the steel industry undergoes a massive expansion.

Brazilian imports are sourced predominantly from Australia (32% in 2003) and the USA (22%). Australia’s share is expected to increase significantly as US exports drop off.

“We have also seen North American exports for the first two months of 2005 up 24% to 8.3Mt. Customers sourcing feed in this extremely tight market have targeted the high cost mines in the US,” ANZ said.

“We expect to see exports surge even further in March before an impending hike in US

rail tariffs (of $US5-$US6/t) come into play from 1 April. Therefore, the second half of 2005 should see exports from North America slow.”

On its outlook for consumption in thermal coal, ANZ weren’t quite as positive, believing the high price in the current cycle had already passed.

“Longer-term, increasing supply over the next two to three years is expected to alleviate the tight market and push prices back down. Prices are likely to remain stable in 2006 and then decline.”

ANZ’s price forecast for the JFY 2005-06 was up 20.5% to $US53/t, down 7.5% for 2006-07 to $US49/t and down a further 6.1% to $US46/t in 2007-08.

Newcastle thermal coal spot prices have stabilised in recent months to trade within a tight band of $US50-$US53/t. This is well short of the low 60s it was trading at in the middle of 2004; but it is still significantly higher than the current contract reference price ($US44/t).

“These high prices have been primarily driven by reduced exports from China as coal, previously earmarked for the export market, is diverted to domestic power generators. Chinese domestic coal demand is likely to constrain exports for the foreseeable future.

“We are forecasting a fall of 5.7Mt, or 7.5%, to 70Mt. Atlantic markets have seen a reduction in supply from Poland.”

ANZ said China’s level of thermal coal exports would be the key driver in demand in the medium to long term. China will most likely look to Indonesia to meet demand.