Supply and demand of coal is expected to be a bit more important in 2009, with the almost irrational movement along with crude oil turning out to be less of an influence.
Coal prices have gone through two really quite extraordinary cycles. Six years ago, the price of coal was $25-30 per metric ton, with a few pluses and minuses. Toward the end of 2003, coal prices started to move up; it moved up quite significantly in 2004 and into early 2005, and reached around $100 per ton. That was still when the coal price seemed to be a consequence of coal supply and demand, which was basically the driver for the upward movement of prices in ’04 and ’05.
But, as always happens in commodity cycles, supply started to run away more heavily than demand, and prices fell, but only to $45-50 dollars a ton by about the autumn of 2006. At that time, number of structural things happened which started to divorce coal pricing from the very traditional supply/demand consequential pricing. A number of commodity funds started to invest in coal as being an important commodity and one in which they had not participated before.
They hit the buy button in late 2006, during 2007, and into 2008. And, combined with this, in Europe, although not in Asia and not in the U.S., there was a much more liquid derivatives market in coal. So coal prices rose from around $50 dollars a ton in September 2006 to a peak of $180/190 dollars a ton in July 2008. All these factors have pushed up coal costs relative to everything else because it was previously undervalued, and created a linkage which probably wasn’t there before.
In Australia, power station coal prices at Newcastle port rose to a seven week high as supplies of the fuel dwindled amid increased production cuts. According to the global Coal News Index, the weekly index for power station coal prices at the New South Wales port increased AUD 2.25 or 2.8 per cent to AUD 81.44 a ton in the week ended January 9, 2009.
Macquarie Group Ltd analysts in a note to clients said that “Over the past month, there have been some positive signs of price recovery and inventory decline in the coal market.” Prices for the fuel at the port have slumped 58 per cent from a July 2008 record on lower crude oil prices and concern that a widening global recession will curb demand growth.
The nation’s central bank said, export prices for coal and iron ore from Australia, the world’s biggest shipper of the raw materials, are expected to drop significantly this year as slowing industrial growth curbs demand. “Developments on the demand side, especially in China which accounts for close to half of global demand, will continue to have a significant influence on prices for coal and iron ore,” the Reserve Bank of Australia said in a report released in Sydney.
The Bloomberg UBS Constant Maturity Index of 26 raw materials dropped 4.4 per cent at the start of the week, the most since December 5, while the price of gold fell 3.9 per cent, the largest decline since December 1. Commodities including coal, iron ore, gold and oil account for 60 per cent of Australia’s export revenue.
Coal price in China rebounded sharply with negotiations between power and coal enterprises hitting an all-time high. Insiders said that reduction and restriction in production has mainly driven the supply down, but that the market would run more balanced in 2009, according to China Securities.
Coal stock at Qinhuangdao Port slid abruptly though. Data shows that 5.236 million ton of coal was piled at Qinhuangdao on January 3, 2009, with 4.677 million ton for domestic trade, sharply diminishing from 8.63 million ton on December 7, 2008, with 7.99 million ton for domestic trade. Pushed by chilling weather in the north area, the consumption of coal rolled up 15 per cent MoM in power plants in December, 2008, which also enlarged purchase for the New Year Day, Spring Festival and Spring Move.
Analyst from Ping An Securities said that coal consumption that declined 13 per cent YoY last December indicated a soft demand from electrical enterprises. High stock would put pressure on the price of thermal coal after the Spring Festival. Besides, lacking supply also resulted in the price leap, as coal miners have strengthened reduction in output and arranged a complete overhaul which has sharply cut production.
American Municipal Power Ohio Inc has chosen Bechtel Power Corporation to build a $3.25 billion, coal fired power plant capable of generating about 1,000 MW in Meigs County in southern Ohio. AMI Ohio and Bechtel said that the station will help stabilize electric prices for the 81 municipal electric systems in Ohio, Michigan, Virginia and West Virginia that will receive power from the plant. The project will employ about 1,600 workers during the estimated four and a half year construction period. Once on line, it will employ 165 full time workers. AMP Ohio, of Columbus, Ohio, owns and operates over 500 MW of generating capacity and supplies power to 126 municipal electric systems in Ohio, Pennsylvania, Michigan, Virginia, West Virginia and Kentucky.
Russian miner Raspadskaya (RASP.MM) said both output and pricing for its coking coal dropped sharply in the fourth quarter as demand from steel makers slumped in the wake of the global financial crisis. Raspadskaya, part-owned by steel-maker Evraz Group said in a statement raw coal production totalled 1.39 million ton, down 57 per cent from 3.26 million ton a year earlier. Average coal concentrate prices in the period were $120 per ton, up 29 per cent from $94 in the fourth quarter of 2007. However, coal concentrate prices were off 46 per cent compared with the third quarter of 2008.
Canada’s largest diversified mining company Teck Cominco Ltd.(TSX:TCK) slid 13 per cent to C$5.73 on January 14, falling for a seventh day. The stock price sank on a credit rating downgrade to BBB- from BBB by Standard & Poor’s Corp. analyst Donald Marleau. Teck used $9.8 billion in loans, more than half of which is repayable this year, to buy Fording Canadian Coal Trust in October.
“On any bad day in the market that’s credit-related, stressed companies are going to be in the forefront,” said Paul Hand, managing director of equity trading at RBC Capital Markets in Toronto. “Teck is in that category.” The Vancouver company has also announced it is cutting 1,400 jobs worldwide and reducing coal production in 2009 due to declining global steel demand.