coal prices to more than double in 2008

Black gold
Coal is now king and very hot
Coal is in its fourth week rally of record highs and predictions are that its prices might double this year.

Author: Rodrick Mukumbira
Posted: Tuesday , 19 Feb 2008



The price of coal entered its fourth week soaring to record highs, amid speculation that its run, in the face of current supply disruptions and surging global demand, was far from over.

The news also got worse for coal-users this week, as mine owners and buyers prepared to negotiate annual contract prices to take effect on April 1, with most analysts predicting coal's four straight weeks of record highs indicates that its price could more than double in 2008.

Power-station coal prices gained US$13.68 to reach US$139 a metric ton on Friday February 15, up 11% from the previous week, according to the globalCOAL NEWC Index. The coal for delivery to Amsterdam, Rotterdam or Antwerp with settlement in the second quarter rose 2.1% to US$145 a metric ton on Friday.

GlobalCOAL's monthly index for thermal coal prices at Newcastle, Australia's biggest coal exporting harbour, rose US$1.71 per metric ton, or 1.9%, to reach US$90.87 in January, the fourth consecutive monthly record.

Spot prices for the thermal coal used in power generation reached US$130 a metric ton during the week ending February 8, and the price has already surged 37% this year following a 73% rise in 2007.

"Spot prices for thermal coal have soared in the past few weeks in response to severe coal production and transportation constraints in Australia, China and South Africa at a time when power utilities are holding critically low inventories of coal," said Goldman Sachs resource analyst Malcolm Southwood in a recent analysis.

He added, "We believe that the factors that have driven thermal coal prices higher in recent weeks will have a profound impact on [the] 2008-2009 contract negotiations."

But the contract prices do not affect the volatility of the market.

Citigroup and Goldman Sachs have in the past few weeks been raising their forecasts for prices of coal used in power plants and steel mills in 2008, citing extreme tightness as global supply growth struggles to keep up with strong Asian demand.

On February 5 Citigroup placed its forecast at US$100 a ton for coal contracts in fiscal 2008 beginning in April while Goldman Sachs forecast the contract price for thermal coal to rise to US$110 a ton, a 98% increase from last year's agreed price of US$55.65 and up 22% from its earlier prediction of US$90.

Both banks also predicted that price of the coal used to make steel will almost double to US$200 a metric ton this year, up 104% from the current contract price of US$98.

This week Bloomberg reported that UBS is forecasting US$100 a ton for power-station coal, while JPMorgan has raised its forecast to US$90, up from US$55.65 this year.

Analysts agree that the catalyst behind coal's record rally has all to do with basic supply and demand.

"All over the world everyone is looking for coal because all economies are developing. That's why we are in this situation," Exxaro Resources Ltd.'s Chief Executive Officer Sipho Nkosi was quoted as saying by South Africa's Daily Dispatch.

But the issue has however been compounded by current supply disruptions emanating from major producers like Australia, China and South Africa.

Last week, the world's biggest exporter of thermal coal Xstrata Plc warned its customers of delays in deliveries from two mines in the Australian state of Queensland citing the heaviest rains in 50 years that have disrupted coal transportation to and from Newcastle, a benchmark for Japan, South Korea and Taiwan.

Australia's biggest coal exporters Macarthur Coal Ltd. and Wesfarmers Ltd. have also indicated that they will not be able to meet contract supplies from some mines in the Queensland state following the rains.

Other Australian companies that have declared force majeure on shipments from some mines, missing contracted deliveries and citing circumstances beyond their control, according to Bloomberg, are the Rio Tinto Group and the BHP Billiton Mitsubishi Alliance.

China, which five years ago exported 83-million metric tons more coal than it imported, has been devastated by the worst blizzard of the past half-century. Last month, it was forced to shut 7% of its thermal power capacity because of supply disruptions caused by the snowstorms.

The country has also shut down over 10,000 mines and has plans to close down a further 1,100, Money Morning reports.

Vietnam, China's largest coal supplier, plans to reduce exports by 32 percent this year and gradually eliminate the sales to meet rising domestic demand, with exports likely to drop to a forecast 22-million tons from 32.2-million in 2007, Bloomberg reported quoting Nguyen Khac Tho, the country's vice director of the Ministry of Industry and Trade's energy and petroleum department.

Another important coal producer, South Africa - a net exporter of coal - will score its first this year by importing coal. Its power utility, Eskom is planning to buy an additional 45-million tons of coal to replenish depleted stockpiles, 45% of which will be imported. Analysts says this will further constrain global coal supply and further push up prices.

"It's clearly a supply issue, it's just one problem after another,'' Mark Pervan, a senior commodity strategist at Australia & New Zealand Banking Group Ltd. in Melbourne, was quoted by Bloomberg as saying on Monday. "It still looks as if we've got some heavy wet weather coming through Queensland and I think the market is going to remain very tight until the whole thing passes