Coal, whose price surge has already outrun those of crude oil and natural gas, is generating an even louder buzz as a rash of bad weather has reduced its production globally.Citigroup earlier this week raised its forecast for thermal coal, saying it now expects prices for the benchmark product to double this year as blizzards in China, power outages in South Africa, and floods in Queensland cut into global output. Meanwhile, demand for coal keeps rising as the world's electricity use expands.
Coal is poised to continue its rally as “tight markets are being further squeezed by new developments,” Alan Heap, an analyst at Citigroup, wrote in a research note.
Prices already have had a remarkable run. Thermal coal prices at Newcastle, Australia - an Asian benchmark for coal used in power generation - jumped 73% last year, beating crude oil as the best performing energy commodity.
This year, coal futures trading on the New York Mercantile Exchange have gained 42%, a contrast with oil futures' nearly 10% decline and a 6% rise for natural gas.
Citigroup's Heap now sees coal reaching $100 per ton at the end of 2008, nearly double 2007's year-end price. Other investment banks, including UBS AG, also raised their estimates for prices of both power-generating and steelmaking, or metallurgical, coal.
The recent run-up in fuel prices means higher costs for consumers and industries heavily dependent on electricity. In China, which gets most of its electricity from coal, smaller metals manufacturers could go out of business due to higher electricity prices, analysts said. At the same time, higher traditional energy prices are likely to push China and other countries to pursue alternative energies to heavily-polluting coal.
Surging coal prices have generally meant good times for miners, however. Shares of Peabody Energy Corp., the largest US coal producer, soared 60% last year, although its shares gave back some of those gains this year amid disappointing earnings and fears of a US slowdown.
Arch Coal Inc. shares have gained 4.4% this year, adding to the 46% gain last year. Shares of Consol Energy Inc. have also moved higher after more than doubling last year. London shares in Switzerland's Xstrata PLC, one of the world's largest coal miners, have jumped nearly 10% this year after soaring 40% last year.
A streak of bad weather is responsible for the recent run in coal prices. Over the past month, deadly snowstorms raging across China grounded the country's transportation system, cutting off coal supplies. Stalled freight trains brought the country's coal reserves to a short-term low. The current stock of coal for power generation is less than half of the normal amount, which is usually enough for 15 days of consumption, according to Minggao Shen, an analyst at Citigroup.
More than 80% of China's power generation comes from burning coal, government data show.
David Riedel, president of overseas-equity specialist Riedel Research Group, anticipates China will sharply increase coal imports in the coming months to build its reserves. Coal demand from China, the world's largest coal consumer, “will be very strong in February and March,” said Riedel.
China, a net coal importer, recently banned coal exports until March, a factor that could further push coal prices higher.
Long-term demand for coal is also high. Demand growth from China is estimated 1.5 times above its GDP growth, which stood at 11.4% last year, Heap said.
Those factors have pushed up the front-month coal futures contract to nearly $80 per ton Tuesday, up from $56 per ton at the end of last year. US-traded coal futures are rising because the US is shipping more coal to Europe, which has seen its coal imports from Africa and Australia disrupted, said Charlotte Wright, a coal analyst at Platts, a commodities information provider.
Coal prices in Asia are running even higher. Prices at Newcastle spiked to $116.44 a ton for the week ending February 1, a historic high, according to globalCoal NEWC index. The barometer tracks coal prices at Newcastle, the world's biggest coal-export harbor.
China's snowstorms coincided with mine closures in other big coal-producing nations.
Power shortages in South Africa, the fifth-largest coal producing country, forced Anglo American PLC, one of the world's top coal producers, to close mines last month.
“The recent power crisis has been triggered by short term influences, but a much deeper supply demand problem is underlying which is unlikely to be resolved until 2012 or so,” said Citi's Heap.
As a result, coal production in South Africa could be disrupted and the fuel normally destined for export may be diverted to the domestic market, said Heap.
In Australia, the fourth-largest coal- producing and top-exporting country, BHP Billiton Mitsubishi Alliance is among four miners that reported they may miss production targets and deliveries after heavier-than-usual rain flooded pits. BHP Billiton Mitsubishi is the world's biggest coal exporting company. The company is a 50-50 joint venture between Anglo-Australian mining giant BHP Billiton Ltd. and a subsidiary of Japan's Mitsubishi Corp.
Reflecting reduced outputs from major mines and the interruption of transportation by bad weather, coal shipments from Newcastle ports fell 26% last week, Newcastle Port Corp. said on its Web site Tuesday.
Port and other infrastructure constraints are expected to restrict Australian coal export until at least 2010, according to Heap.
As a result of coal shortages and surging prices, the Chinese government last month ordered power restrictions in more than half of its provinces. China could see more power outages if the snowstorms linger and coal reserves remain low, analysts said.
Recent disarray in coal supplies could also translate into long-term problems. On top of them, a lack of port and rail infrastructures is restricting supplies and the entry of new players worldwide.
“These bottlenecks are most evident in Australia, but are also present in South Africa, Canada, Russia and China,” Heap said. As a result, the long term growth trend on thermal coal demand is considerably higher than many other commodities.
Besides power-generating coal, Citi also lifted its price prediction of coal used in steelmaking to $200 a ton in 2008, up from last year's $95. (marketwatch)