Industrial Metals

In 2012, China is apt to be the driving force of the coal markets, followed by its fellow emerging markets.

By James Wellstead – Exclusive to Coal Investing News

As the page turns on 2011,  China looks to shape the fate of coal market in 2012. In response to recent concerns surrounding the health of its economy, specifically its red hot construction and real estate sectors, it seems fitting that 2012 is the year of the Dragon on the Chinese Lunar calendar as the “Dragon” economy, accompanied by its fellow emerging markets, is likely to be the force majeur of coal markets, again, in 2012.

According to the International Energy Agency’s 2011 Medium-Term Coal Market Report (the IEA’s first ever report solely focused on thermal coal), the importance of China to global coal markets cannot be understated. “Chinese domestic coal market is more than three times the entire international coal trade,” and as such, “any imbalance between Chinese production and demand has the ability to have a large impact on global coal trade.”

While the various coal producing and consuming regions of the world (e.g. Australia, Canada, Indonesia and the US) will no doubt play a role in determining coal markets in 2012, they will likely do so only in as much as their activities affect their relation to Chinese coal demand.

And though 2012 is likely to start out on the same tend sheepish foot that it finished off on in 2011, analysts at UOB-Kay Hian Ltd still believe that China’s “strong demand and supply tightness should continue to support coal price uptrend in 2012.”

Coking Coal

Softened by sluggish emerging market growth forecasts, coking coal prices softened as they entered the New Year. Constrained by contracting Chinese and emerging market growth and uncertainty over European debt crisis, many remain “cautiously optimistic” about 2012′s prospects.

Leading into 2012, Platts Coal noted the disinterest of Chinese coking coal traders in signing new contracts as tight year-end credit conditions will limit most transactions for the time being. Concerned about shrinking credit availability and the specter of a real estate and construction bubble, China-based coking and iron ore traders appear reticent to take big gambles as stocks run-down likely until after the Chinese Lunar New Year (January 30).

India, though less affected by the quick retrenchment of funds, looks fairly similar. While the country is likely to experience growth in coking coal consumption in response to the World Steel Association’s predictions of steel consumption growth of 7.9 percent in 2012, growth appears to slow from 2011 rates. Overall world steel consumption is also trending downward in 2012, falling to a 5.4 percent increase from 6.5 percent in 2011.

But despite these projections, growth is continuing at a strong clip as Indian steel giants SAIL (NSE:SAIL) and Tata Steel (BSE:500470) continue to expand production capacity, with Tata adding 10 million tonnes in 2012.

Thermal coal

While falling natural gas prices have begun to incise into coal-powered electricity production in more developed US and European markets, thermal continues will continue to thrive in emerging markets in 2012.

“For all of the talk about removing carbon from the energy system,” Maria van der Hoeven, IEA executive director told the Financial Times recently, “the IEA projects average [thermal] coal demand to grow by 600,000 tonnes every day over the next five years”. While slower than the 720,000 T/day consumption rates of the 2000s, thermal coal is positioned to remain the most important energy source outside of crude oil.

But in the short run, 2012 is likely to see some contraction in the rate of thermal coal consumption. In the US, Platts Coal reported that only four transactions occurred on over the counter (OTC) markets for February 2012 contracts. In each of the contracts leading out into 2012, values were projected down on the year.

Coal’s future remains bright

Despite what may be shaping up to be a slow start for coal in 2012, the long term growth prospect of coal will continue to be a critical growth commodity.

With such staggering growth prospects as noted by the IEA’s recent report, it comes as a small surprise that coal producing countries are strengthening their ties with the world’s second largest economy (China).

Canadian coking coal miners Teck (TSX:TCK.B) and Peace River Coal (TSX:NNE.A) are just two of the companies in Canada’s coking coal markets who have invested heavily in their linkages with Asian, particularly Chinese, markets.

Investing more than CAN $300 million in the expansion of Ridley Terminals in Prince Rupert, British Columbia, the four year expansion project aims to double the port’s export capacity (primarily of coking coal) to 24 million tonnes a year. With millions invested in expanded production directed squarely at Chinese markets, coal industry participants are eager to reduce any barrier that might stifle the connection between coal production with booming Chinese demand.


 Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.


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