Australian coal cargoes were bid at steady levels on Thursday as analysts said
China's recent default on a thermal coal cargo was unlikely to mark the start of
a torrent of cancellations.

While high stockpiles in China after months of weak demand and record high
imports have dampened demand from the world's top coal consumer and prompted
some companies to seek delays on their deliveries, traders said the appetite for
overseas coal could be sharpened by easing freight rates and firm domestic
prices.

Traders said on Wednesday that a cargo of high-ash, low volatile content
Australian thermal coal already on the water was being offered at about $72 a
tonne (CIF) after a Chinese buyer cancelled the contract, marking the first
confirmation of a Chinese buyer defaulting on a contract.

Traders with four Australian producers, which have contracted large amounts of
thermal coal into southern China over April and May, told Reuters they had not
yet experienced any defaults from Chinese buyers, although one of them said it
had received requests to delay some shipments due to high stockpiles.

Most trade sources and analysts said the unusual re-offer was likely caused by a
spike in freight rates last month, after the cargo was booked, which brought
about the closure of an arbitrage window for imports.

"The positive arbitrage window appears to be closing because of a recent jump in
freight rates. This more likely explains the reason why Chinese traders -- who
are notoriously price sensitive -- have cancelled the seaborne order," Katie
Dean, an analyst at Australia & New Zealand Bank, said in a note.

In a sign that traders are still upbeat on Chinese demand, bids and offer prices
on electronic trading platform globalCOAL were little changed on Thursday, with
an October delivery cargo from Australia being bid at $71 a tonne and offered at
$75.50.

Prices settled at $71.38 a tonne on Wednesday, down 12 cents from a day ago and
$1.12 lower than a week earlier.

Traders also dismissed speculation that the cancellation was linked to the
growing political tension between China and Australia, after Beijing detained
staff from Australian miner Rio Tinto Ltd., on accusations of stealing state
secrets.

SHIPMENTS PERFORMING WELL

Producers say it's unlikely their Chinese orders will be affected by the recent
volatility in freight rates as they had already booked the vessels and locked in
prices at the same time the coal orders came through.

"It wouldn't make sense for the Chinese to cancel these cargoes, considering how
cheap they've managed to buy them," said an executive at a Australian producer.

"This particular shipment was probably cancelled because the freight wasn't
booked in earlier. The deal was probably done by a small-time trader that
doesn't understand the logistics of moving coal."

Australian producers say most of the shipments sold to China over April and May
were priced in the low-$60s range on a free-on-board (FOB) basis, with a landed
price of around $88-$91 a tonne, inclusive of freight and taxes. This compared
with a current landed price of around $94 a tonne for domestic supplies.

In China, key traders and power plant officials in southern China's Guangdong
province also dismissed the possibility of defaults.

"When we locked in contracts early on, it was priced on a cost and freight
basis, so there's no reason for us to cancel or delay any shipments," said an
official in the coal procurement department of a large power group in Guangdong.

Some analysts say recovering power consumption in China -- where power output in
June turned positive for the first time in eight months due to hot weather and
higher economic activity -- along with a recent fall in freight rates, could
revive demand.

"High sticky Chinese production costs will keep Chinese coal prices high, and an
expected pullback in freight rates will create a more attractive delivered
Australia coal price," said ANZ's Nate.

Prices of thermal coal in China were little changed at between 600-610 yuan FOB
($88-$89) in the latest week for coal with a heating valye of 5,800 kcal/kg
(NAR), while prices of coal with a calorific value of 5,500 kcal/kg (NAR) edged
lower by 5 yuan to 555-575 yuan.