Singapore — Seaborne thermal coal traders are facing significant losses on their positions after prices plunged in the past few weeks due to a weak Chinese demand despite this being the seasonally strong fourth quarter.
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The calendar fourth-quarter of each year has always been seen as a strong period of demand, especially from China, as utilities replenish their stock levels to brace for the Northern Hemisphere winter season.
However, this year's fourth-quarter took many by surprise as China continues to impose more restrictions on thermal coal imports and, in fact, at some provinces have totally stopped seaborne coal from entering Chinese ports for the rest of the year.
Traders, who had taken positions for the fourth quarter in anticipation of a strong demand, are left with no option other than performing on their existing contracts and raking up huge losses.
Seaborne thermal coal prices have already plunged to two-year lows and as of Friday and are still expected to weaken further to fresh all-time lows in the near term.
"I read the market incorrectly. Now I still have to perform on the contracts and probably I will have to divert the cargoes to India," a trader said. "But seeing that China is on the sidelines, India will only bid $25/mt FOB for 4,200 kcal/kg GAR now," he said.
The price of Indonesian 4,200 kcal/kg GAR coal -- a grade popular among Indians, Chinese and other Asian nations, has slumped 38% so far this year to be assessed Thursday at $29.25/mt, S&P Global Platts data showed.
The price had touched $25.70/mt in October 2015, the lowest level ever seen since Platts started assessing this price in 2012.
Many market participants say that it is just a matter of time for 4,200 kcal/kg GAR price to breach fresh lows as both major coal importers in India and China remain dormant in the spot market.
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INCREASING INDONESIAN PRODUCTION
The last two years had been quite significant for the coal industry because of the steep increase in prices that were seen after a long period of bearishness.
The seaborne thermal coal prices had seen a continuous downtrend since 2012, and only began to increase since the latter half of 2016, mainly driven by Chinese demand.
However, apart from China's huge influence, there were also several other factors like labour strikes and weather-related disruptions seen at most of the coal producing regions across the globe, which lent support to prices. But market participants are now wondering if prices will ever pick up in the near to medium term as several countries in Asia try to embrace the cleaner renewable energy and as investments in new coal-fired power plants slump.
While demand appears to sag, Indonesia, on the other hand, is keen to ramp up production. The Indonesian government had approved of a plan to increase total coal production target to 507 million mt from its previous target of 485 million mt.
Several market participants feel that this increased production would only put additional downward pressure on prices if China does not emerge from its hibernation any time soon.
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PRODUCTION COSTS UP
With oil prices also having increased from 2015 levels, Indonesian producers may not be able to withstand any further price falls as production costs are high, sources said.
"Either they will have to shut down or cut production. In fact, we are already seeing very low cv coal producers shutting shop as prices are not at all favourable and stripping ratios are also very high," an Indonesia-based trader said.
"Miners can go down till $25/mt [for 4,200 GAR] in the worst case scenario," a south India trader said. "From what I know $25/mt is the cost of production and beyond which it doesn't make sense to sell anymore."
Indonesian suppliers still seem to be hoping to see a pick-up in demand from China post the Lunar New Year holidays in 2019.
However, some of the market participants remain bearish as China's domestic production remains robust and new coal-fired power plant additions slow.
-- Deepak Kannan, firstname.lastname@example.org
-- Edited by Elizabeth Thang, email@example.com