Coal Prices to Recover on 2012 As China, India May Limit Purchases

Coal Prices to Recover on 2012 As China, India May Limit Purchases

Coal in Asia is unlikely to recover in 2012 from its first decline in three years as electricity-price controls prompt Chinese and Indian utilities to limit purchases of the fuel.

Power-station coal at the Australian port of Newcastle, a benchmark price for Asia, will average about $118 a metric ton next year, according to the median estimate of six analysts and traders surveyed by Bloomberg News. Prices have averaged $122 so far in 2011. Coal at Richards Bay in South Africa, which supplies Asia and Europe, will trade at about $111 a ton in 2012, down from $118 this year, the survey showed.

Power providers in China and India, Asia’s biggest energy users, are struggling to recoup their costs as governments restrict prices to curb inflation, reducing the incentive to boost electricity generation from thermal coal. China may slow imports of the fuel next year after increasing shipments by about 10 percent this year, according to the China Coal Transport and Distribution Association. Indian purchases may also fall, said Rahul Bhandare, chairman of Knowledge Infrastructure Systems, a coal trader. “Where the two countries are alike is on the situation of their utilities, squeezed between high coal prices, both domestic and international, and regulated domestic power prices not allowing them to run at a profit,” said Emmanuel Fages, the Paris-based head of European energy research at Societe Generale. “Raising power prices is difficult for local authorities for economic and social reasons.”

Power-station coal at Newcastle with a heating value of 6,700 kilocalories per kilogram fell 10 percent this year to $113.60 a ton on Nov. 18, after climbing 46 percent in 2010 and 8.5 percent in 2009, according to data from IHS McCloskey, a Petersfield, England-based researcher.

The price for the fuel with a heating value of 6,000 kilocalories per kilogram at Richards Bay, Africa’s biggest coal terminal, fell 16 percent to $104.30 as of Nov. 23, according to McCloskey. It rose 69 percent in 2010 and slid 30 percent in 2009, the data show.

Power plants in China, the world’s biggest coal user, face the smallest profit margins in at least five years, according to Sanford C. Bernstein & Company. Coal costs more than 95 percent of the wholesale electricity price at benchmark plants it tracks, exceeding the level in 2008, when the nation suffered a wave of blackouts, data compiled by Michael Parker, a Hong Kong-based senior analyst at Bernstein, show.

Huaneng Power International, the nation’s biggest electricity provider, reported a 79 percent drop in net income in the third quarter from a year earlier.
The Chinese government has kept electricity prices unchanged for more than five months as it focuses on fighting inflation, which Premier Wen Jiabao said last month was his top economic priority. China’s inflation rate has dropped from a three-year high of 6.5 percent in July to 5.5 percent last month.

Power rates paid by non-residential users were raised in 15 provinces in June, the first increase in more than a year, and fees paid by some distributors were boosted. Residential prices were unchanged. More than 70 percent of Chinese generators are fueled by coal.

Electricity output was 364 billion kilowatt-hours in October, up 9.3 percent from a year earlier, according to the National Bureau of Statistics. That lagged behind the 13.2 percent increase in production by factories, which account for about 70 percent of Chinese power demand. Electricity consumption will rise 9.5 percent in 2012, Barclays said in a report.

India has been reluctant to raise power prices as the economy slows and the central bank tries to curb inflation that exceeded 9.7 percent in October. The Reserve Bank of India has lifted its benchmark repurchase rate 375 basis points since the start of 2010 and last month forecast the economy will grow 7.6 percent in the year ending March 31, lower than the 8 percent it estimated previously. The government faces at least five regional elections next year.

“Power tariffs are politically sensitive and are not often revised,” Devendra Pant, an analyst at Fitch Ratings in New Delhi, said in a Nov. 14 note. “State power utilities have large accumulated losses.”

Coal accounted for 66 percent of India’s electricity generation in the 2011 fiscal year, Pant said. The variable cost of producing power using imported fuel is about 3 rupees (6 cents) a kilowatt-hour compared with an average tariff of 3.50 rupees, according to New Delhi-based Knowledge Infrastructure, which imports about 4 million tons a year of coal.

Indian utilities bought 23 million tons from overseas in the first half of the year ending March 2012, compared with 55 million expected for the full year, Sabine Schels, a London-based analyst for Bank of America, said. The nation faces a shortage of 142 million tons of coal for power stations and steelmakers in the year, the coal ministry estimated in February.

NTPC, India’s largest power producer, said income from electricity generation, before interest and tax, fell 1.3 percent in the second quarter after fuel costs climbed 24 percent to 106.5 billion rupees. Total expenditure rose 7 percent, according to an Oct. 25 statement. Adani Power’s profit missed analyst estimates after fuel costs more than tripled in the quarter, the company said.

Electricity generation and coal demand may still be spurred by another increase in Chinese power prices. Shares in the nation’s utilities, including Datang International Power Generation and Huaneng Power surged in Hong Kong on Nov. 8 after Deutsche Bank upgraded its recommendation on the industry to “overweight,” saying the government may raise rates charged to distributors within months....

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