Thread: Coal Prices May Double In Coming Year

Coal Prices May Double In Coming Year
Vivian Wai-yin Kwok, 02.05.08, 4:13 AM ET

HONG KONG -

The devastating snowstorms in China plus floods in Queensland, Australia, further compounded by power crises in South Africa, may lead to world coal prices doubling in 2008-2009.

Primarily because of the amplifying supply-side pressure in the coal sector, Citigroup forecast that the annual contract price for thermal coal will reach $100 per metric ton in the 2008-2009 financial year, up from $55 per ton now, while the price of coking coal may also mount to $200 per ton from $95.

The tightening of the coal market, already squeezed by slower growth in Indonesian and Australian exports and stronger demand from Asia, has been further hit by bad weather in producing areas, which paralyzed processing and shipment from major coal mines.

Recent heavy rain and record flooding across central Queensland have resulted in substantial short-term disruptions to operations. At the Ensham mine, the 8 million metric ton per year thermal coal producer, the pit was flooded. Two million metric tons of thermal coal production will be lost.

Coking coal production is likely to be even more severely affected, with many producers such as BHP Mitsubishi Alliance, a joint venture of BHP Billiton (nyse: BBL - news - people ) and Mitsubishi (other-otc: MSBHF - news - people ) Development, warning that coal deliveries will be delayed and declaring force majeure on supply contracts. Citigroup estimated 4 to 5 million metric tons of coking coal output will be lost.

In South Africa a coincidence of peak seasonal demand, maintenance shutdowns and wet weather hampering coal deliveries forced state-owned electricity provider Eskom to resort to load shedding--shutting down 4 gigawatts of power generation to prevent a system overload--curtailing energy supply to mines and other heavy industries. These disruptions have uncovered a deeper problem--lack of investment in electricity generating capacity--which will not be resolved until at least 2012-13.

In China, the biggest snowstorm in 50 years had triggered serious power shortages, leaving 17 provinces facing brownouts and interrupting power supplies to industrial users including smelters. As in the case in South Africa, the current chaos has brought to the surface a problem rooted in power tariff caps, low coal prices, coal production curbs and infrastructure bottlenecks. (See: " Problem In Black And White In China")

Citigroup predicted that the tight supply of thermal coal, the most common and cheapest coal, used in the production of electricity at thermal power stations, will begin to ease from 2010 as port and rail bottlenecks in Australia are removed. However, potential sources of additional supply of coking coal, an important ingredient in the production of steel, are much more difficult to identify, and prices are expected to remain higher for longer term.

Other developments will also boost coal prices, including sharply higher exchange rates in producing countries and cost increases. Production costs have been rising 14% per year, and further cost inflation is expected, if at a slower rate. "As a consequence we have increased our long term prices to $120 per ton for hard coking and $50 per ton for thermal," Citigroup projected.

http://www.forbes.com/markets/2008/02/0 ... ets01.html

Isn't the US one of the top three coal producers in the world? Why would this affect us? The US has huge coal deposits.