*WORST WINTER
China's coal needs, which surged in recent months as the country battled one of its worst winter in decades, has eased sooner than expected, producers and traders said, adding that many utilities on the southern coast had probably purchased enough supplies to last thro ugh March. Scant evidence of Chinese buying for the second quarter also added to concerns that thermal coal prices, up as much as 20 per cent this year, could slide further.

RETREATING BUYERS
Thermal coal prices on the global COAL Newcastle weekly index fell $12.39 from a week ago to $89.61 a tonne, free-onboard (f.o.b) Australia's Newcastle port. "The Chinese buyers came into the market in full force in December and January but they are now retreating very quickly," said a Singapore-based trader.  "There's a lot of uncertainty about Chinese demand going forward and that's weighing on, the market. Supplies from Indonesia is also expected to increase over the coming weeks as the weather improves, so that's another bearish factor," the trader said. Producers and traders did not expect Chinese demand to wane until after the Chinese New Year, but warmer weather, the reopening of the key Qinhuangdao coal port last week and increased coal supplies in the domestic market, means there is no longer an urgent need for supplies.

LUKEWARM INTEREST
Most producers said Chinese buyers were showing lukewarm interest for the second quarter, rather waiting for lower spot prices or more favourable freight rates. Still, an Australian producer said he was in talks with a major Chinese buyer to sell 500,000 tonnes of coal for delivery in the second quarter. The buyer was looking to purchase the shipments at about $85-90 a tonne (f.o.b,), based on coal with a calorific value of 6,080 kcal/kg (NAR). Prices vary depending on ash and sulphur content.

*DE-STOCKING DRIVE
"We're bullish for steel this year," said Nomura analyst Mr Gavin Wood. "We think destocking will drive the volume recovery and it is going to have a bigger impact than most people expect." Nomura expects European hot-rolled coil (HRC) import prices to rise to $743 a tonne this year, compared with $518 a tonne last year and versus $943 a tonne in 2008, at its peak. Macquarie predicts HRC will rise to $639 a tonne this year, backed by a forecast of a 30 per cent rise in iron ore benchmark prices this year.

CHINA RISK
"We're not expecting a major underlying recovery but we think there's going to be strong price recovery, also helped by higher raw material costs," Mr Wood said. A big risk to prices is China, the world's top producer, which could flood the rest of the world with its steel exports, if domestic demand begins to slow. China's steel production reached 518 million tonnes in the first 11 months of 2009, accounting for 47.5 per cent of the global crude steel production at 1.09 billion tonnes in the same period.

MANAGING OVERCAPACITY
"The big question mark is how will Chinese industry manage this overcapacity? If they just sell it off abroad then it would be very negative for the overall industry," Moody's analyst Mr Matthias Hellstern told Reuters in a recent interview. And for a recovery in real demand from key steelmaking consumers such as the construction and car industry and real consumption, the industry will have to wait until next year, and possibly another two years, to see the boom times of 2007. The lack of that recovery, coupled with the uncertainty on when and how strong demand will be could squeeze margins as raw material prices rise. "With the slow pace of underlying demand recovery in the mature economies (2007 demand levels are not expected to be reached until 2012 or beyond) there is a limit to how far and how fast producer profitability can recover on the basis of pricing momentum alone," said Mr John Lichtenstein, global leader of steel at consultancy Accenture.

The year has begun on a positive note for coal with prices .showing a rising trend. Outlook for the popular energy source is getting increasingly constructive thanks to optimistic expectations of recovery in global economic activity, and more importantly continued stellar role played by the two Asian giants, China and India. "Continued strong import demand from China and India should support a premium in Pacific coal, while a broad-based recovery in other Asian countries will further support upside momentum," said Barclays Capital in a report recently.

MARKET DRIVERS
This is a big change from the situation obtained in 2009 when the market was driven by weak demand in the Atlantic basin in the wake of recession experienced by major industrial economies. In addition, gas prices were attractively low in a market with oversupply. However, countries in the Pacific basin came to the coal market's rescue and turned key positive influencers. The strength of import demand from China and India saved the market from a near-imminent collapse. There is hope 2010 will continue to register large import demand from Asian economies; and that the western countries would show broad-based recovery as is widely anticipated. In the event, coal price risks are skewed to the upside, according to Barclays Capital. India is turning into a large producer, importer and consumer of coal. A significant part is used by the power utility sector followed by steel (coking coal). According to a report of the working group on coal and lignite, the projected domestic availability of coal shall be 680 million tonnes (mt) against the projected demand of 731 mt in the terminal year of the Eleventh Plan period, that is, 2011-12.

SUPPLY-DEMAND GAP

DELISTING ISSUE
BIFR had already had two hearing sessions on the draft rehabilitation scheme during which one of the procedures regarding the delisting of shares of Steel Complex was discussed and cleared. While the company's shares stand delisted in the Bombay Stock Exchange, steps have been initiated for delisting from the Cochin Stock Exchange, which is expected to come through within a month. The State Government and its agencies such as Kerala State Industrial Development Corporation (KSIDC) have 87, 6 per cent stake in the equity of the company and the balance 12.4 per cent is held by institutions and private investors. The rehabilitation scheme offers an exit option for the private share-holders at the same consideration at which SAIL obtained the shares.

TERMS OF AGREEMENT
The joint venture agreement, signed in December 2008, envisages 50:50 equity participation by the partners and the 87.6 per cent holding with the Government has been equally split between them. The remaining stake also will be shared equally as and when the private investors exit the company. According to Mr. P. Saidev, Chief Executive Officer, Steel Complex Ltd., a plea was made at the second BIFR hearing for the early sanctioning of the rehabilitation scheme. This elicited a favourable response and a final approval is expected by the end of next month. One of the issues is the settlement of dues to the State Government such as sales tax and electricity bill arrears and the Government has decided to write them off. The company had earlier cleared whatever liabilities it had towards banks and financial institutions through one-time settlement.