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Longest coal slump since 2005 poised to end

By Bloomberg News

MELBOURNE, Australia - Coal for power stations is set to end its longest slump in seven years as producers reduce output, raising the prospect of price increases just as colder weather in the northern hemisphere boosts fuel demand.

Thermal coal at the Australian port of Newcastle, the benchmark for Asia, may rise to more than $100 a metric ton in the three months ending Dec. 31, from $84.25 a ton as of Sept. 28, according to UBS. Macquarie Group predicts prices will average $98 for the rest of the year while Bank of America and Wood Mackenzie forecast the fuel will cost $92.

An increase in prices would snap four straight quarters of declines, coal's worst streak since 2005, and underscore how companies from Alpha Natural Resources, the second-largest U.S. producer, to Indonesia's PT Berau Coal Energy have been cutting output in response to slowing economic growth.

China, the world's biggest producer, reduced capacity by more than Australia's entire output after prices tumbled 22 percent in the first half of the year. Chinese utilities have started rebuilding inventories, according to UOB Kay-Hian, the securities-broking unit of Singapore's third-biggest bank.

"There has been a significant level of supply cuts, which means that we should at least have a relatively firm floor on the thermal coal price of around $85 to 90 a ton," said Riaz Hyder, an analyst at Macquarie in Jakarta. "We don't see a lot of downside to that because of the supply response in addition to seasonal improvement in demand."

Glencore International is anticipating a rebound in prices to justify its $33 billion bid for Xstrata, the world's largest exporter of coal burned by power stations.

Xstrata this week recommended Glencore's sweetened offer after initial opposition from shareholders. The fuel accounted for 24 percent of Zug, Switzerland-based Xstrata's 2011 sales. The combined company will have interests in about 35 coal mines in Colombia, Africa and Australia, and account for about 10 percent of global seaborne exports, putting Chief Executive Officer Ivan Glasenberg's reputation for well-timed investments on the line.

Coal dropped 3.6 percent in the week ended Sept. 28, according to IHS McCloskey, a Petersfield, England-based provider of data. The fuel averaged about $86 a ton in the third quarter after slumping 17 percent in the second three months of the year, the biggest drop in more than three years. Coal has averaged almost $98 so far this year.

Chinese miners may have idled output equivalent to as much as 300 million tons of capacity this year, or 7 percent of the national total, brokers including Mirae Asset Securities Co. and Sanford C. Bernstein & Co. said in August. Output from Indonesia, the largest exporter of the fuel, may reach 340 million tons this year, down from a previous forecast of 360 million tons at the end of June, as some miners reduce production targets, Bob Kamandanu, chairman of the Indonesian Coal Mining Association, said Sept. 19.

Bumi, Indonesia's biggest exporter of thermal coal, cut the production forecast for its PT Berau Coal Energy unit to a range of 20 million to 22 million tons, from an earlier estimate of 23 million tons, due to rain earlier this year, it said Aug. 9. Bumi is the London-listed owner of stakes in PT Bumi Resources and PT Berau Coal.

Japan, Asia's second-largest importer of thermal coal, may increase purchases by 4 percent this year as nuclear power plants remain shuttered, Australia's Bureau of Resources and Energy Economics said last month.

"The northern hemisphere goes into winter at the end of the year, so there is a restocking campaign," said Daniel Morgan, a commodity analyst at UBS in Sydney who predicts prices may rise as much as $20 a ton by December. "There is a seasonal lift usually every year in the fourth quarter."

Coal's 8.9 percent decline in last quarter of 2011 was the fourth time in the past 10 years that prices have fallen in the final three months of the year, according to IHS McCloskey.

Newcastle coal prices gained 33 percent in the fourth quarter of 2010 and advanced as high as $138.50 a ton in January 2011, the highest since September 2008, after rain and flooding curbed output from Australia.

The potential for higher Chinese demand this quarter is less likely after the country revised down its economic growth forecast to 7.7 percent from a year ago, according to a Sept. 25 note from Barclays Bank Plc, which predicts prices will average $87 a ton in the fourth quarter. China's economy expanded 9.3 percent in 2011 and 10.4 percent in 2010.

Glencore's takeover of Xstrata "is a bet" on coal, said Jeff Largey, a London-based analyst at Macquarie.

"Glencore must be assuming, as we do, that coal remains key to the energy mix for decades," Largey said. "Coal still accounts for about 80 percent of the energy production in China and 45 percent in Japan, and coal will remain the baseload for Japan even as it moves away from nuclear, so globally it's not possible to get away from coal."


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