Indonesia and China will determine the supply and demand balance for thermal coal in the Pacific region.

Coal and Allied, a Rio Tinto Group company, chairman Chris Renwick told the company's annual general meeting recently that Indonesia continued to be a strong supplier of thermal coal in the Pacific region.

"During 2005, strong supply growth for thermal coal in the Pacific region came from Indonesia , however, this was largely offset by China 's export position diminishing," he said.

"Semi-soft coking coal demand was strong in the first half of the year but eased towards year-end. Looking forward, we expect demand for Australian coal to remain firm in 2006.

"For thermal coal, we anticipate the supply and demand balance will be largely determined by supply growth in Indonesia and China 's evolving net export position."

Recent trends in the spot and forward markets in the Pacific and Atlantic regions support this positive outlook for thermal coal.

Continued demand growth is expected from South-East Asia , particularly  Malaysia and Thailand ; Latin and Central America and from the more traditional  markets for Australian producers, Korea and Taiwan . These regions are experiencing  significantly increased economic growth and resultant increased forecast energy  demand.

Coal & Allied will need to maintain sufficient stock levels to ensure it is positioned to  take advantage of any additional available capacity in the port and rail infrastructure.

This will allow Coal & Allied to capitalise on pockets of demand growth.

"While coal prices are high and demand is strong, the operational challenges presented  by shortages of key inputs remind us of the need to stay focused on the basics of our business.

"In the face of increased costs and shortages in labour and other inputs we know that we must continue to work hard and remain committed to continued improvement.

"As our mines are relatively high on the global cost curve, we must also work that much harder to ensure we stay competitive. Harnessing the knowledge and ingenuity of our  employees to focus on business improvement initiatives will be, I believe, the key to our  ongoing financial success. This focus will ensure we maintain a strong competitive position for the time when coal supply and demand balance and prices inevitably subside."