July 7 (Bloomberg) -- Coal may extend declines from the highest since 2008, putting it on course for the weakest quarter of the year, as China boosts hydropower use and Japan struggles to start damaged plants against a backdrop of slowing growth.
Thermal coal at the Australian port of Newcastle, the benchmark price for Asia, will range from about $100 to $120 a metric ton this quarter, according to seven of 10 analysts, traders and producers surveyed by Bloomberg News. Coal averaged
$120 a ton in the second quarter and $128 in the first three months, according to data compiled by Bloomberg. The high for this year was $138.50 in the week ended Jan. 14.
China is using increased rainfall to boost hydropower production at the same time as Japan is working to repair plants damaged by the March earthquake, and monsoons in India disrupt coal shipments from Indonesia and Australia, the world's biggest exporters. Prices have fallen in the third quarter from the previous three-month period in six of the past seven years.
"We expect a 15 to 20 percent drop" in prices, said Rahul Bhandare, chairman and managing director at Knowledge Infrastructure Systems Pvt, a coal-marketing company in New Delhi, India. "Economic factors including ballooning inflation
in India and China and problems in Europe will affect the coal trade."
China was the biggest driver of global prices in the past two years as its purchases of coal for power generation rose to 92 million tons in 2010 from 15 million in 2008, making the nation the world's second-biggest importer of the commodity after Japan, according to Societe Generale SA.
Imports may fall 16 percent this year to 77 million tons, Emmanuel Fages, a Paris-based analyst at Societe Generale, wrote in a note on June 17. The nation will keep purchases at about 90 million tons, Neil Dhar, executive vice president at Noble Group Ltd., a commodity-trading company, said in Bali in May.
Benchmark prices at China's Qinhuangdao port are already stalling. Coal with an energy value of 5,500 kilocalories per kilogram stopped rising for the first time in a month at 845 yuan ($131) to 860 yuan a ton in the week ending July 4, according to data from the China Coal Transport and Distribution Association in Beijing.
Rizhao New North Coal & Chemical Industry Co. and Guangzhou Twinace Petroleum & Chemical Corp. were among those forecasting declines for coal in the Bloomberg survey. Australia & New Zealand Banking Group Ltd. and Citigroup Inc., predicted prices may rise, citing regional differentials within China and reduced production in Australia.
Coal shipped from Qinhuangdao to the southern port of Guangzhou, where Chinese demand is greatest, cost $153.50 a ton, or $8.74 less than deliveries from Newcastle, as of June 10, close to the smallest discount since December, according to Seoul-based Mirae Asset Securities Ltd. Coal from Newcastle includes freight charges and tax.
"You are now seeing the arbitrage re-opening for Newcastle coal versus Qinhuangdao," said Mark Pervan, head of commodity research at Australia & New Zealand Banking in Melbourne. "If the Chinese come back into the market with coal prices becoming more attractive for them internationally and you've got a Japanese market that's revisiting increased thermal capacity, I reckon it looks pretty good." Prices will average as much as $135 a ton in the third quarter, according to Pervan.
Coal may also gain after wet weather in Australia's Hunter Valley, the largest coal-producing region in New South Wales, Citigroup said in a June 7 report. Prices for immediate delivery may rally to more than $130 a ton, analysts led by Daniel Hynes in Sydney said.
Chinese utilities typically build inventories for the summer from April to July. Stockpiles at Qinhuangdao, which ships half of the country's seaborne coal, rose for the fourth week to 7.95 million tons as of July 4. Imports climbed to a
four-month high of 13.6 million tons in May, according to Chinese customs data.
"It's difficult for prices in the south to increase," said Jay Chi, the Guangzhou-based chief analyst at Guangzhou Twinace Petroleum & Chemical Corp., which buys Indonesian coal to supply power stations in southern China. "As far as we can see, stockpiles at power stations and inventories waiting to be sold are quite high. Hydropower is also back."
China's daily hydropower generation rose 12 percent to 2.31 billion kilowatt hours in mid-June from the beginning of the month, partly as rainfall improved flows along the Yangtze River, the site of the world's biggest hydro dam, according to June 28 data released by the National Development and Reform Commission.
Japan, the world's biggest importer of power-station coal, reduced total coal imports by 22 percent to 13 million tons in May from a year earlier after the March 11 earthquake and subsequent tsunami shut thermal generators, the Finance Ministry
in Tokyo said on June 20.
The nation's demand will drop to 110 million tons this year, from 120 million in 2010, amid the closures, Masato Uchiyama, director of energy business at Electric Power Development Co. in Tokyo, said on May 31. Societe Generale estimates it will fall to 103 million.
India's monsoon, which accounts for more than 70 percent of the nation's rainfall, is 7 percent above a 50-year average since the season began last month, the country's New Delhi-based weather bureau said June 27.
The four monsoon months of June to September can slow coal imports on the west coast, where ports including Mundra, Dahej and Kandla are located. Shipments are typically diverted to the east coast where congestion at ports such as Tuticorin and
Ennore leads to delays in offloading.
Prices will fall by at least $5 to $6 a ton "in the next few months," said Vinay Prakash, chief executive officer for coal and carbon at Gujarat-based Adani Enterprises Ltd., India's biggest coal trader.
China has increased interest rates five times since October to contain inflation, which has been above the government's 2011 target of 4 percent every month this year.
"Demand in the third quarter won't change much and prices may stagnate or slightly fall," said Supriatra Suhala, executive director at the Indonesian Coal Mining Association in Jakarta.
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--With assistance from Paul Gordon in Hong Kong and Winnie Zhu
in Shanghai. Editors: Paul Gordon,