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Clancy Yeates
May 25, 2009

A SURPRISE surge in Chinese demand for high-quality coal used in steel making has raised hopes that Asia’s growth engine could offset the slump engulfing Australia’s biggest export.

Queensland’s coal terminals at Hay Point and Dalrymple Bay last month posted their strongest results since November, shipping 7.2 million tonnes from the region’s coking coal mines.

Producers say the turnaround was driven by heavy Chinese buying on the spot market – in stark contrast to the country’s traditional role as a net coal exporter.

After slashing production when recession hit last year, miners are meeting the extra demand by running down stockpiles. If the surge continues, it could help revitalise demand for the type of coal that fetched $US300 a tonne last year, compared with about $US125 ($161) a tonne in recent contract negotiations.

The chief executive of Felix Resources, Brian Flannery, said after making one shipment to China in four years, the company was likely to sell 10 shipments this year, possibly more. “We’ve had a cutback in the Japanese off-take, which has probably been picked up by our Chinese off-take,” he said.

The executive general manager of corporate development at Macarthur Coal, Ian McAleese, said the Chinese buying had prompted “quite a significant turnaround” in demand but the longevity of the surge remained uncertain. “Because they historically have not been in this market, it’s very difficult to get a read,” he said.

Producers say it has suddenly become cheaper for Chinese companies to buy coal from Australia because of difficulties setting domestic prices. China’s Government has closed several mines because of safety concerns, further limiting supply.

A spokeswoman for the world’s biggest private coal producer, US-based Peabody Energy, said the extra demand was equivalent to 10 million tonnes a year of coal being sent to China. Although it had not offset the global slump in world production, she said the company was confident the market was picking up.

While the trend is promising for the industry, coal is unlikely to test the record contract prices of last year while the world’s biggest buyer – Japan – remains in recession.

An analyst at Patersons, Andrew Harrington, said demand growth in India and China was the most likely reason behind any improvement in the coking coal market in the next six months.

But hopes of a fast recovery were hit last week by news that Japan was shrinking by 15.7 per cent a year, the fastest rate of decline since the Second World War. “There will be too much uncertainty, even in the first quarter of next year, to be confident of a price increase,” he said.

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