Power-Station Coal Prices May Decline, McCloskey Says

By Angela Macdonald-Smith

Nov. 6 (Bloomberg) -- Prices for power-station coal may fall further because of potential oversupply and as the market returns to being driven by demand, currency and cost factors rather than by speculative investors, The McCloskey Group said.

Record prices earlier this year were driven by ``speculative play by the banks and hedge funds'' rather than by fundamentals, which are ``weak,'' Gerard McCloskey, founder of the consulting firm, said today in a presentation to a conference in Sydney. Demand growth this year is set to be the lowest on record, he said.

Prices for thermal coal exported from Australia's Newcastle port, the world's biggest export harbor for the fuel, were at $100.83 a metric ton in the week ended Oct. 31, down from a record $194.79 in July, according to the globalCOAL NEWC Index. The International Monetary Fund predicts the world's advanced economies will grow next year at the slowest pace since 1982.

Growth next year in demand for power-station coal in both the Atlantic and Asian regions may be ``slight,'' McCloskey said in the presentation. South African exports to India may increase, while Russia may ship more from the Pacific coast to Asia and export capacity may increase in Australia, he said.

``Current levels for steam coals look stable for now,'' McCloskey told the conference by telephone from London. Demand is still sufficient to ensure growth in seaborne trade, with consumption set to increase by 15 million tons to 615 million tons, more than double this year's expected growth of 6.2 million tons, he said.

`Quite Robust'

Prices for coal burned in power plants may drop 25 percent from current levels this year or next as demand weakens and supply grows, Societe Generale SA said this week. Citigroup Inc. last month cut its forecast for the 2009 contract price for the year starting April 1, 2009, by 38 percent to $100 a ton. Merrill Lynch & Co. cut its forecast 24 percent to $130 a ton.

Still, power-station coal should fare better in an economic slowdown than coking coal used in steelmaking, Andrew Pedler, senior research analyst at Wilson HTM Investment Group, said at the conference. Japan and South Korea are expanding coal-fired power generation capacity this year, while India needs to increase imports and Vietnam and Indonesia have plans to add plants, he said. Demand ``remains quite robust,'' he said.

Demand for coal in developing Asian nations will also be boosted by an expected deferral in natural gas supply projects because of difficulties small and medium-sized petroleum companies face in obtaining finance, said Mark Hutchison, senior director of Cambridge Energy Research Associates in Singapore.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net