Coal market heats up on supply constraints
Global supply issues impact U.S. coal prices and supply
By Dave Hannon -- Purchasing, 1/31/2008 12:12:00 PM
A rash of major coal supply issues around the world has made U.S. export coal more attractive—and more expensive.
Floods in Australia, the world’s second largest coal exporter, temporarily shut down mines and forced several producers to declare force majeure, driving coal prices in that region—most headed to China--to record highs on limited supply. (Only today did Rio Tinto announce its two Queensland mines were back open, while BHP Billiton expects it coal joint venture with Mitsubishi Corp. will be reduced for as long as six months).
Also affecting global markets was the news that China announced a two-month halt to coal exports, as it becomes more concerned with its domestic power needs. Turning off the Chinese supply for two months has impacted global prices. BNP Paribas's Lance He, said about the Chinese market, “Given the tight supply, we believe incremental coal demand would mainly trade at spot prices. We expect large coal makers' spot sales to increase in 2008. We expect coal makers to enjoy average selling price hikes in 2008.”
And to add insult to injury, coal fields in South Africa were experiencing power shortages, limiting their ability to produce their usual coal supply.
All of which caused JP Morgan recently to increase its 2008 global coal price forecast to $90/metric ton, a 61.7% increase from last year's price of $55.65 and a 28.5% increase from its earlier forecast of $70, according to Reuters.
And the supply impact is being felt in the U.S. both in terms of supply and price of coal. Spot U.S. coal prices have risen steadily according to data from U.S. Energy Information Administration. Last week, Central Appalachia coal rose nearly 3% from the previous week, to $59.90/ton. Northern Appalachia coal rose 2% to $63/ton, and Powder River Basin spot prices gained almost 4% at $12.30/ton.
And the coal futures contracts on the New York Mercantile Exchange have been up significantly this year.
But it’s more than just the short-term impact that buyers are concerned with. Peabody Energy CEO Gregory Boyce said in the company’s earnings statement that "Global coal demand and pricing continues to rise for all coal products, U.S. prices continue to strengthen, and the pull of Eastern U.S. coal into the export markets…Global coal prices are at high levels and rising, world coal inventories are low and decreasing, U.S. exports are accelerating, and new coal-fueled generation is being built at a fast pace. These market fundamentals lead to expectations that both metallurgical and thermal coal price settlements will be significantly above prior-year levels."
Coal miner Consol Energy said in its recent earnings statement that the increased demand for U.S. coal in global markets could drive U.S. miners to sign long-term contracts with overseas buyers. “With the strength of global coal demand expected to continue unabated this year, we could sign additional international contracts for steam coal this year with durations of seven to 10 years," the company said.
In other coal-related news, the U.S. Energy Department has pulled funding for a coal-burning clean power plant slated for a site in Mattoon, Ill., which would burn coal and capture the carbon dioxide underground. As reported by news sources, the Energy Department cited cost escalation in the plant’s construction and said it will fund "multiple" projects with the aim of getting commercial-scale integrated gasification combined cycle coal plants operating by 2015.
See also: Energy demand from emerging markets to drive coal use
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