A major factor contributing to the softening metallurgical coal market has been the displacement of imports by local production in China and India.

Citigroup said imports in China were running at an annualised rate of 4.2 million tonnes, down from 7.2Mt in 2005. Previously, analysts had predicted China would be on the way to becoming a 10Mtpa importer.

“Seaborne imports are being displaced by imports from Mongolia [up 40% year-on-year] and local supplies. Upgrading of infrastructure is allowing more efficient deliveries from inland coal fields to coastal steel mills,” Citigroup said.

In India, metallurgical coal imports fell 25% in 2005 and some steel mills are using more local coal in their coking blends.

In Australia, exports have fallen 6% year-on-year. Citigroup said whilst production disruptions and port constraints had played a role, part of the drop could be attributed to a response to soft markets.

“Another sign of weak markets is Hunter Valley producers diverting product from semi-soft to thermal. We expect semi-soft prices to retreat to their traditional $US2-3/t premium to thermal coal,” Citigroup said.

“Looking further forward, we forecast further weakness once port and rail infrastructure bottleneck[s] in Australia ease in 2008.”

On thermal coal, the brokerage said despite a recent price weakness the thermal coal market was relatively tight. It attributed strong demand to reduced Chinese exports and strong European imports.

Also, Indonesian export growth appears to have slowed, while South Africa’s exports have been disrupted by more rail problems.

Citigroup predicted imports by India would continue to rise for several years before domestic production caught up with demand.

Australian exports of thermal coal are up 12% to 110Mtpa on an annual basis. Next year, Hunter Valley production will increase 5-7Mt and Newcastle Port will increase its capacity.