Japan calamity to affect Asia-Pacific thermal coal producers

Thermal coal producers in Asia-Pacific region are likely to feel short-term financial impact from the March 11 tsunami and earthquake in Japan, rating agency Standard & Poor's, said.

Producers may find it difficult to deliver contracted coal to Japan and prices will probably fall in the region due to over-supply. The situation could stabilise within a few months, however, as demand and prices for thermal coal pick-up, the agency said.

The earthquake in north-eastern Japan crippled about a tenth of the country's electricity generation capacity, particularly for nuclear and thermal power. Some of the damage may be beyond repair. Some thermal power plants of Tokyo Electric Power Co Inc and Tohoku Electric Power Co Inc were badly hit, according to the rating agency.

These plants will be unable to take delivery of the contract cargoes of thermal coal because of flooding or equipment damage. Even utilities directly unaffected by the earthquake may find it difficult to accept deliveries due to limited capacity at ports and inland transportation, storage and handling issues.

"For the next 3-4-months, thermal coal exporters can expect their sales volumes to Japan to drop 10-15 per cent. But this will be only a temporary decline," Standard & Poor's credit analyst, Suzanne Smith, said.

"Despite a short-term negative impact on coal producers, the earthquake is not a significant negative credit factor," Smith observed.

Japan is the world's largest importer of thermal coal. It imported more than 100 metric tonnes (MT) of the commodity in 2010. Indonesia, Australia and Russia are the top thermal coal suppliers to Japan.

Indonesia's largest supplier of coal, PT Bumi Resources Tbk, exports about 20 per cent of its coal (about 12 MT) to Japanese power producers.

"Thermal coal producers such as these are likely to divert shipments to energy-hungry neighbours, including China and India. Such diversions may create short-term over-supply in these markets, leading to lower prices. Margins for coal producers are therefore likely to fall over the next few weeks," Standard & Poor's said.

"We expect demand for thermal coal to rise again globally over the next year as it is a safer energy option than nuclear power," Smith said adding,"demand for electricity will rise as Japan steps up reconstruction activity over next few quarters."