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Coal prices may stay weak despite fewer China "price majeures"

Source : REUTERS
Last Updated: Thu, Sep 20, 2012 17:10 hrs

* Fewer price renegotiations but shipment delays seen

* High-priced inventories to limit imports

* Chinese traders say they bought too much

* But China set for higher 2013 total imports

By Fayen Wong and Jacqueline Cowhig

SHANGHAI/LONDON, Sept 20 (Reuters) - Coal prices have steadied after sliding for months, giving relief to miners and traders as fewer Chinese buyers try to lower agreed contract prices, but prices may stay weak as some customers are still hoping to defer shipments.

China is the world's top coal importer, and even tiny percentage shifts in what it buys have amplified effects in the global spot market.

"Price majeures" contract renegotiations and shipment deferrals of up to 8 million tonnes of coal into China could pinch its import appetite again in 2013.

"The biggest lesson for Chinese traders this year is not to over-commit. After what has happened, I think many of us will be a lot more cautious in deciding how much to buy and at what prices," said a Shanghai-based trader who asked not to be named.

"We will also have to deal with carried over delivery contracts and tighter credit facilities from banks. Along with a weaker economic outlook, I think we will cut our import volumes next year."

Shipping firms are often caught in the middle of wrangles because buyers delaying shipment can break contracts by not nominating vessels chartered to lift cargoes, said a shipbroker who asked to remain anonymous because the issue is sensitive.

Widespread renegotiations of coal and iron ore contracted prices and shipment times by Chinese trade buyers peaked in May-June, shocking a market that had grown complacent about never-ending Chinese spot demand supporting prices .

Suppliers of Indonesian coal to China were worst-affected because China takes more coal from Indonesia than anywhere else.

Coal contract re-negotiations are "really common when prices are going down and stay down for a long time," said Bob Kamandanu, chairman of the Indonesian Coal Mining Association.

China is set to import a record 210 million tonnes of coal this year, up from 182.4 million in 2011, and to remain one of the biggest if not the single largest importer for many years.

Despite its own vast output of over 4 billion tonnes a year, imports especially into coastal regions far from the northern mines will remain competitively priced against domestic coal more often than not, suppliers said.

Spot coal prices are range-bound between $83-$90 a tonne, driven down 20 percent since January by oversupply, and there is scant chance of a recovery this year until global production cuts start to bite.

IMPORTS TO STAY SLUGGISH

Chinese imported coal inventories will remain high until prices rise because firms holding stockpiles cannot sell without making crippling losses, and until these are digested, China's imports are unlikely to recover to first-half levels.

Through this year the same firms seeking price adjustments and delays have continued to buy fresh cargoes at spot prices because they could sell these to end-users - baffled some players trying to understand China's slowdown in power demand growth, renegotiations and new buying.

Combined coal stocks at six big power generators in eastern and southern China fell 1.6 percent on the week to an average 12.9 million tonnes per day, with enough inventories for 22.4 days of consumption, Qinhuangdao Port data showed on Thursday.

The 20 percent slump in coal prices in the second quarter from around $120/T in January to two-year lows of $81.50 for FOB Newcastle Australian cargoes in July was largely driven by record U.S. thermal coal exports.

DEFAULT OR "PRICE MAJEURE"?

Indonesian miners have said the need to average out prices of cargoes shipped at higher prices and those yet to be shipped at spot levels, and to delay shipments as a serious nuisance but not a disaster, and common when markets tumble.

These adjustments are mostly "price majeures" situations where either party, but usually the buyer, seeks a price adjustment to reflect a significant move in spot levels.

Reports in June of widespread defaults that turned out to be mostly price majeures accelerated the price slide on sentiment rather than hard facts or abundant distressed cargoes.

Major Indonesian miners including Thailand's Banpu PCL , Bayan Resources and PT Bumi Resources , had Chinese counterparties unable to take delivery of June/July cargoes bought at prices $20 a tonne above spot.

"The mentality is that they can't afford to take account of price movements, so if the price moves down they want to renegotiate the contract," said Bayan's Alastair McLeod.

"Some rescheduling has happened but not so serious," said Sean Pellow at miner PT Indo Tambangraya Mega.

Bumi, one of Indonesia's top three exporters, averaged out the prices on a string of over 10 panamax cargoes of low-grade coal sold to a Chinese trading firm for 2012 shipment but avoided a default, sources with knowledge of the situation said.

Bumi declined to comment.

The problem centres on contracts between international traders selling to private Chinese traders. Producers generally and larger traders selling to state-owned buyers have had far fewer problems, partly because buyers want to keep good relationships and secure supply from these sources.

But the number of straight defaults, when a buyer rejects a commitment, have been far fewer than indicated by press reports.

"It wouldn't make sense for Bumi -- or any other suppliers for that matter -- to play hardball and insist on the previously agreed prices because there were plenty of defaults and other sellers were offering steep discounts," a Singapore trader said.




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