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Faltering Chinese demand keeps beating down coal prices

Published 05/10/2015, 06:20 pm
Updated 05/10/2015, 06:28 pm
© Reuters.  Faltering Chinese demand keeps beating down coal prices
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* Morgan Stanley (NYSE:MS) cuts long-term coal price forecast

* Producers benefit from weaker currencies to lift production

* Coal most prominent victim of end of commodity "super-cycle"

By Jacob Gronholt-Pedersen and Henning Gloystein

SINGAPORE, Oct 5 (Reuters) - Slumping Chinese demand continues to batter thermal coal prices in the first week of the fourth quarter, with benchmark physical cargoes dropping to their lowest in more than eight years.

That has made coal, mostly used for power generation in emerging markets, the most prominent victim of what some say is the end of a commodity "super-cycle" that followed the rapid industrialisation of China after it opened up in the 1980s. ID:nL5N1222IU

Prompt cargo prices from Australia's Newcastle GCLNWCPFBMc1 and from South Africa's Richards Bay GCLRCBPFBMc1 terminals have both dropped to around $50 per tonne, close to levels last seen in the first half of 2007. ID:nL5N11L02O

Key coal futures prices TRAPI2Yc1 last week settled below $50 per tonne for the first time since 2003, having fallen in twelve of the last fourteen weeks.

"Declining thermal coal prices reflects abatement in China's industrial activity," said Tom Price, analyst at U.S. investment bank Morgan Stanley.

The bank on Monday cut its long-term price forecast by 11 percent to $63 per tonne on a free-on-board basis (FOB), as demand in China drops amid abundant supply.

U.S. competitor Goldman Sachs (NYSE:GS) said in September the resource would never again gain enough traction to lift it out of its slump and warrant investment into the sector. ID:nL5N11T014

Coal is the main fuel for electricity in China, but power output is now growing at only 4 percent per year, far below annual growth rates of around 10 percent since 2000, Morgan Stanley noted.

China's coal imports have collapsed some 30 percent since the beginning of the year, even as major producers China Shenhua Energy 601088.SS 1088.HK and China Coal Energy 601898.SS 601898.HK cut domestic output.

Morgan Stanley expects a short-term recovery in coal prices over the next year, followed by a flat price outlook for an extended period.

The fall in coal prices, along with routs for other mined raw materials such as iron ore, has contributed to a clobbering of the shares of BHP Billiton (LONDON:BLT) BHP.AX , Rio Tinto (LONDON:RIO) RIO.AX and other mining giants, which have taken a bigger beating than those of most energy firms. ID:nL5N11Z1DK

Weakening currencies of resource-rich producers such as Australia, South Africa and Columbia has also added to the glut of coal and other mined commodities.

"In the massive, highly competitive global thermal coal trade, any favourable exchange rate move simply encourages exposed miners to lift or sustain production rates in order to preserve market share," Morgan Stanley's Price said.

A drop in oil prices have also helped miners lower production costs by 5 to 10 percent this year, he said.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ GRAPHIC-API2 coal futures:

http://link.reuters.com/rap75w GRAPHIC-Coal producer share prices:

http://link.reuters.com/tap75w

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Editing by Tom Hogue)

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