MTECHTIPS

MTECHTIPS:-Thermal Coal: Strike, weather potential agents for supply disruption

 With no foreseeable major demand catalyst to bring prices higher, and few producers demonstrating the inclination to adjust volumes, the primary risk to the upside in thermal coal may be a supply side disruption either in the form of wider strike action or weather-related effects. As of yet there is no clear sign that these factors will in fact materialise, said Deutsche Bank in a report.Unlike precious metals production, thermal coal production in South Africa has so far escaped major disruptions on account of labour unrest. The exceptions are the Umlabu mine workers, which have been on strike since 24 October along with the Mooiplaats mine since 22 September.Australian and Russian thermal coal production saw yoy increases in Q3-2012 despite Newcastle and Russia West FOB prices being 28% and 29% lower yoy. At current Newcastle prices, 11% of Australian export volume is uneconomic, and Russia West prices suggest that as much as 55% of Russian production is uneconomic.Widespread signs of a production response are lacking, and Deutsche Bank is therefore neutral to negative on thermal coal pricing in the near term despite the already-low level relative to marginal costs.