Production shortfall likely to help keep flagging prices above regional levels Policy measures to engineer a soft landing for the mainland economy and higher energy utilisation efficiency are likely to keep the brakes on demand for coal next year, according to analysts. The world's largest coal producer and consumer will see domestic demand grow 7.48 per cent next year, to 2.08 billion tonnes, Xinhua reported yesterday, quoting a report by the State Council's Development Research Centre. That compares with a growth rate for this year likely to emerge at 11 per cent once the final accounting is completed, after 12.9 per cent growth last year, according to the China Coal Transportation and Distribution Association, whose comments were cited in a CLSA research report. The association predicted growth of 8.7 per cent for next year. 'The growth slowdown is closely linked to the macroeconomic soft landing,' said the State Council think-tank. 'Higher coal utilisation efficiency, increased usage of replacement energy such as natural gas and lower consumption by the transportation, construction and residential sectors also contributed to the slowdown.' It is estimated that the power sector will account for 50.5 per cent of coal consumption next year while the oil refining, chemical, cement and steel sectors will take up 29.3 per cent. On the supply side, CLSA expected production to grow 8.8 per cent this year, 8.6 per cent next year and 7.7 per cent in 2007 - growth rates below projected rises in demand. The shortfall arises from increased efforts by the central government this year to close or curtail production in unsafe mines, notes CLSA. The modest supply growth will nonetheless help to prop up domestic coal prices which are expected by the brokerage house to outperform prices in the surplus-supplied East Asian export market next year. Spot market coal prices in Newcastle, Australia have fallen to US$40 a tonne on a free-on-board basis from a peak of just over US$60 in July last year, said CLSA. The spot price is now about 25 per cent below long-term contract prices. Coal buyers and sellers are expected to meet late next month to negotiate next year's long-term contracts. CLSA forecasts that domestic contract prices for coal used to fire power plants will be flat next year although spot prices are tipped to fall 5 per cent to 10 per cent and export prices to decline 15 per cent. Buyers are likely to enjoy easier negotiations on next year's contracts, it notes, since transport bottlenecks at ports and railways have eased substantially this year with power plants' coal inventory rising to more than 15 days from a few days at the height of a stock hold-up last year.