Coal: The Dark Horse In Waiting

- October 21st, 2009

Demand for coal to generate electricity and make steel in China and India is expected to grow by 7-8% annually in the next five years, leaving the world chronically short of the fuel. Moreover, currencies linked to coal have outperformed both their emerging market and G-10 peers.

By Kishori Krishnan Exclusive To Coal Investing News

As industrial activity rebounds from last year’s economic downturn, the world is witnessing a coal shortage, all of which is driving up prices.

Coal prices are destined to go even higher as they follow the rise of ‘coal currencies’ such as Australian Dollar (AUD), South African Rand (ZAR) and Columbian Peso (COP).

The BofA Merrill Lynch Global Report on energy pointed out that many “oil currencies” including UAE Dirhams (AED) and Saudi Arabian Riyal (SAR) are pegged to the US dollar, but coal exporters tend to keep a free float therefore currencies linked to coal have outperformed both their emerging market and G-10 peers.

The report notes that near upside gains in steam coal will be limited to US dollar weakness.

Predictions are afloat that steam or thermal coal is expected to shoot up to $100 per tonne by 2012, up from around the current $70. Point to note: metallurgical or coking coal is already selling for $160 per tonne — way above this year’s benchmark of $129.

Chronically short

Demand for coal to generate electricity and make steel in China and India is expected to grow by 7 per cent to 8 per cent annually in the next five years, leaving the world “chronically” short of the fuel, the head of US coal miner Peabody Energy Inc (BTU.N) said on Tuesday.

Outlining his company’s plans to double exports from Australia to handle Asian demand and to develop its joint venture in Mongolia to produce coal for the Chinese, chief executive Greg Boyce added: “We believe China is short of met (steel-making) coal and demand is shredding supply and pushing prices north.”

Peabody President Richard Navarre noted that China had become the company’s biggest metallurgical coal customer in just one year, as the country had imported 25 million tonnes so far in 2009, more than 10 times last year’s pace.

Through August, China’s net imports of thermal coal totaled 38 million tonnes compared with net exports of 7 million tonnes last year.

Peabody’s mines in the Powder River Basin of Wyoming and Montana would likely produce the extra coal needed to supply the Pacific market. Peabody has also opened an Asian trading hub in Singapore, established a new business center in Indonesia and plans to further expand international investments.

Short supply

India may be as much as 200 million tonnes short of its needs in five years, positioning it as the fastest-growing coal importer.

For its supply, India will have to turn to seaborne markets. In the next five years with 7 per cent to 8 per cent growth compounded annually, which is 300 million to 400 million tonnes per year, the demand is far set to outstrip supply.

Recent indicators are sure-fire pointers – South Africa exported 1.4 million tons of coal to India from the Richards Bay Coal Terminal during September 2009.

Export prices rose 45 cents, or 0.7 per cent, to an average of 64.05 a metric ton in the week ended October 16, according to McCloskey Group.

The week was “very quiet,” Andrew Wells, an assistant editor at Petersfield, England-based McCloskey, said. He speculated that buyers may be waiting for the October 25-27 Coaltrans coal conference in London to get a better feel for the market.

The price of coal delivered to northwest Europe is expected to climb to more than 100 a ton by the middle of next year. That price rose 1.6 per cent last week to 73.60 a ton, McCloskey data show. It has slid 38 per cent over the past 12 months.

Richards Bay Coal Terminal shipped 22 per cent less of the fuel in September than a year earlier. Exports decreased to 4.16 million metric tons from 5.32 million tons.

Even China exported 2.02 million tons of coal in September down by 2.9 per cent year on year compared with the 2.08 million tons in last September.

Company news

Pike River Coal may turn to its Asia-Pacific customers with a share offering to raise $20 million needed for operational outgoings in the first half of 2010.

In a quarterly report to shareholders, the NZX-listed company said despite operational improvements over the last two months, pushed-out dates for the first coal deliveries and sale proceeds had increased working capital costs.

Pike River is waiting for primary funder Liberty Harbor to extend the US$ 27.5 million convertible bond from November to June 2010, as it requires the company to be capable of producing 800,000 tonnes in the six months from condition date, which is unlikely to be met.

About $20 million is needed to bolster existing funds and loan facilities for working capital, which may come from increased debt or equity, the company said.

Chief executive Gordon Ward said an Australian-based specialist coal industry commercial adviser had canvassed its Asia-Pacific customers and believed there was strong interest in securing a long term coal off-take agreement at competitive market prices, possibly including a share placement at a premium to Pike River’s share price.

Xstrata Plc, the world’s largest exporter of coal used by power stations, said third-quarter output of the fuel gained 7.9 per cent after it acquired two Colombian mines in March.

Production increased to 21.9 million metric tons, from 20.3 million tons a year earlier, the Switzerland-based company said.

Total coal output, including coking coal, advanced 8.9 per cent to 25.6 million tons. Volumes of platinum group metals, refined nickel, zinc in concentrates and lead also gained.

Xstrata, which last week dropped a proposed merger with Anglo American Plc, shuttered some Canadian and Australian mines in the first half and cut spending after demand for commodities slumped.

Indonesian state coal miner PT Tambang Batubara Bukit Asam Tbk (PTBA.JK) said on Wednesday it had been given government approval to start development on a new rail line in South Sumatra that would boost coal output.

The transport ministry had approved in principle a 307 km rail line connecting its coal mine in Central Bangko in South Sumatra province to the port of Lampung, on the southern tip of Sumatra island.

“The approval gives certainty to start the rail project,” the firm said, adding the new railway would have the capacity to transport 20 million tonnes of coal a year.

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