Asia's thermal coal supply squeeze, which has driven spot prices...

Asia's thermal coal supply squeeze, which has driven spot prices to record highs of over $72 a tonne, is set to worsen next year as Indonesia and Australia struggle to meet feverish demand growth in China and India.

Tight supply could push spot prices to average about $75 a tonne in the first quarter of 2008, traders and producers said, and long-term contract prices between Australian producers and Japanese utilities by as much as 10 percent.

"The market is going to be very, very tight next year. It will be worse than this year," Peter Ball, vice president for marketing at Indonesia's largest coal producer PT Bumi Resources , told Reuters.

"Apart from China and India, demand will also rise when Mexicans start to come to the market. When they finally do, we don't know where the coal is going to come from."

Coal consumption is expected to increase rapidly in Mexico, where state utility Federal Electricity Commission has mapped out plans to increase its generation capacity to 56,785 MW by the end of 2012, compared with current 49,834 MW.

According to globalCOAL's NEWC index, spot thermal coal prices for the first quarter of 2008 were traded at about $71, while average price for the year stood at $65-$68.

"Considering the recent China-Japan 2007 contract price was struck at a $67.90 a tonne, a 10 percent increase between Australian and Japanese for 2008 contract is not overly bullish," said Clyde Henderson, an analyst at Wood Mackenzie consultancy.

The impact of China's surging appetite for coal in recent years has largely been cushioned by a corresponding swell in Indonesian coal output, which has surged by 20-25 percent each year.

But after years of solid production, Indonesia's output growth is set to halve largely on a dearth of investments in the last decade. Indonesia's government has forecast coal output to rise just 10 percent to about 196 million tonnes in 2007.

Top five Indonesian producers -- Bumi, Banpu , PT Adaro, PT Kideco and PT Berau -- which account for nearly 75 percent of the country's total coal output, have forecast total production from the five miners to rise just 7.5 million tonnes to 155 million tonnes in 2008, half the range of 2007's increase.

Some coal producers said the Asian market faces a deficit of 15 million tonnes this year, which will have to be brought in from the Atlantic market. In 2008, this deficit could rise to 25 million tonnes, producers said.

Australia, the world's largest thermal coal exporter, is forecast to ship 121.1 million tonnes of coal in 2007/08, compared with 114.7 million tonnes last year, government data show.

But some remain sceptical given the failure to reach past forecasts and the delays dogging various port expansion plans.

"There has been a lot of talk and assurances about the vessel queues easing and new capacity. But with demand coming from all around, we can't be too sure," said a Taiwanese buyer.

Analysts said freak incidents such as extended rainfall in Indonesia or port issues in Australia next year would also jack up prices.

The Asian market of Japan, Taiwan, South Korea, Philippines and including India and Pakistan, accounts for more than half of global coal demand.

CHINA SUCTION

Many analysts and officials have said the Chinese coal market was likely to reach a balance this year and would become a net importer next year. It was a net importer in the first half of this year, but restored its net exporting status in July. [ID:nHKG178169]

Some producers estimated that China's large-scale withdrawal from coal exports would result in a net loss of 30-34 million tonnes of coal in the Pacific market this year and more than 45 million tonnes in 2008.

Industry sources said high international prices have prompted Chinese utilities in the southern coast to increasingly seek sub-bituminous coal, which has lower heating value, to fuel their power plants -- a move that would jeopardise South Korea's and India's coal supplies.

The scramble for alternative suppliers would mean demand for South African, Russian and even Canadian coal shipments, which have trickled into Asia since June, is set to rise.

"Asian utilities will just have to realise that it will be a necessity to diversify and buy from producers further afield," said a trader. "The longer they wait to secure 2008 supplies from South Africa, the more they will have to pay."

Underpinned by growing Asia-Pacific demand, coal prices are likely to stay at robust levels in the next five years, Australia's government forecaster said.

"The situation of undersupply, or supply tightness, will likely remain for quite a few years because there are very few large-scale coal mines coming online," said Alan Copeland, a commodity analyst at the Australian Bureau for Agriculture and Resource Economics.

"And nearly every country in Asia has drawn up plans to build more coal-fired power plants."