Coal Supply Tightens

By Desmond McMahon—Exclusive to

Coal Investing News

Analysts expect coal prices to continue to rise after a strong first quarter performance with demand from China and the United States putting increased pressure on limited supply. And, The World Bank approved funding for a massive coal-burning plant in South Africa.

Steel-making coal prices jumped 22 percent last week over the previous week, according to the weekly Energy Publishing Coking Coal Index.  Prices rose to $241.67 a ton for the variety of coking coal known as “high-vol,” up from $198.50 the previous Friday.

Both POSCO senior vice-president Kwon Young tae and Puda Coal Inc. chief financial officer Laby Wu expect coal prices and demand will continue to rise.

Reuters reported that POSCO, South Korea’s second largest steelmaker, expects tight raw material markets in the second half of this year, with demand from China and the United States continuing to buoy prices.

Young tae says, “We expect tight conditions to continue in the iron ore and coking coal markets in the second half. We will set raw material procurement policy in accordance with these expectations.”

The Macquarie Group Ltd estimated China’s demand for coal used to make steel is forecast to rise 5.6 percent.

“Demand is still strong,” Wu told Business Week from Beijing speaking of coal in general. “Prices will increase from 2009 due to strong demand for electricity generation.”

Wu expects coal prices will increase this year as the nation’s industry expands and a drought in the southwest region reduces hydro-power generation.

Wu said China’s top economic planning agency projects coal production won’t meet supply this year and the country will remain a net importer. Electricity generation is projected to increase by seven percent in 2010, which will also place a higher demand on the coal supply. According to Wu, domestic raw coal production will only rise three percent this year.

Certainly, the numbers from some of China’s top coal producers back up Wu’s assertions that demand will exceed supply.

China Coal Energy Co Ltd, the country’s second-largest coal miner by revenue, announced its coal output was up 53 percent over 2009 numbers to 10.88 million tonnes in March while the company’s total coal sales volume increased by 67 percent from the previous year to 10.63 million tonnes.

China Shenhua Energy Company Limited, the second largest coal mining enterprise in the world, announced their coal production was up 8.3 percent to 56.1 million tonnes in the first quarter while sales raised 14.2 percent to 65.1 million tonnes.

Meanwhile, Peabody Energy (NYSE:BTU), the world’s largest coal mining enterprise, is still in the bidding for Australian-based Macarthur Coal after raising its initial offer by 14 percent to $3.8 billion. This comes as Macarthur rejected a $3.44 billion takeover bid from rival Australian coal firm New Hope (ASX:NHC).

Macarthur, the world’s largest producer of low-volatile pulverized injection coal used in steelmaking, had already rejected an earlier offer takeover from Peabody Energy saying the offer “did not represent an adequate premium.”

Analysts at Citigroup expect mining giant Xstrata and China’s Citic Group to enter the bidding race and it’s likely other companies will show interest, causing a bidding war for Macarthur.

World Bank Votes for Coal

The World Bank made a clear statement regarding coal-fired power plants April 8^th, when it approved for a $3.75 billion loan to South Africa’s state-owned electricity supplier Eskom Holdings Ltd to help build one of the world’s largest coal-fired power plants. The Bank believes electricity plays a central role in poverty reduction and, by moving ahead with this project, is favoring  cheap energy to help raise people out of poverty over the concerns of environmentalists.

“The Eskom project seeks to support South Africa’s efforts to achieve energy security,” the World Bank said in a statement.

“We believe that there can be no poverty reduction without power, and sustainable development cannot be achieved without addressing climate change… the Eskom project is helping to get this balance right,” the Bank said.