By James Wellstead – Exclusive to Coal Investing News
With its dark and sooty constitution, coal is continually praised for having a future as bright as its burning embers. While 2011 was not as radiant as its long term projections—stymied by natural disasters, political melees and a flagging global economic reality—both thermal and coking coal markets saw consistent production and consumption growth.
However, three important dynamics have been, arguably, important features of 2011 thus far. The rising role of developing markets (predominantly China) in reshaping coal consumption and shipping trends, the predominance of soft or “above ground” issues related to political, social and environmental challenges, and the continued confusion surrounding the fate of the global economy have all guided the broad developments for coal markets in 2011.
2011 coal market events
As the year began, extensive flooding in the Australian province of Queensland led to record breaking coking coal prices as monsoon rains washed away some AUS $2.1 billion in sales by coking coal majors (BHP Billiton (NYSE:BHP), Xstrata Plc (LSE:XTA) and Rio Tinto Group (NYSE:RIO)) operating in the region. On the whole, the natural disaster caused losses in the Australian coal mining region of some US $473 million a week in exports during the month of January.
While production in the Australian coking and thermal coal heartland eventually returned, bringing in export earnings growth for thermal coal up AUS $641 million, the country’s coal industry was faced with important political and legislative changes. In November, Australia’s Senate passed a carbon tax which will impose an AUS $23/MT of greenhouse gas (GHG) emissions cost for heavy polluters (like coal miners) starting in mid-2012. In the same month, the lower level of parliament pushed ahead its mining industry “super” profits tax legislation after more than a year of debate settling on a 30 percent tax levied on coal and iron ore producers with profits above AUS $75 million/year beginning next July.
Further north, the natural disaster caused by the Japanese earthquake, tsunami and ensuing nuclear meltdown disaster also briefly deformed thermal coal markets as a large portion of Japanese electricity grid capacity—the world’s number one thermal coal importer—was destroyed. Analyst expectations of significantly reduced thermal demand and prices followed with resulting impacts on thermal prices. While the disaster claimed more than 20,000 lives and destroyed huge swaths of steel refining capacity, a quicker than expected Japanese recovery was able to buoy thermal prices more quickly than expected.
Some of Japan’s demand recovery was aided by China’s continued meteoric growth of thermal and coking coal demand, one of the most important current dynamics in coal markets in 2011. Chinese thermal imports were so strong this year that Platt’s report suggested Chinese thermal coal prices could supplant the Australian Newcastle 6,000 kcal/kg price benchmark due to the declining volume on the Newcastle index. China, which only became a thermal coal importer in 2008, has exploded as a thermal importer with 150 million tonnes projected for this year and has even been said to have sparked to life the declining American coal producers who see the Asian market as a godsend to their bottom line.
Coal prices drag on economic concerns
But, the last quarter of 2011 has not been kind to coal markets on the whole. With an economic malaise plaguing American and European industrial and job growth, and more importantly the recent evidence of retrenching Chinese and developing market growth, coking and thermal prices have slid over the past three months.
Coking coal contracts, which started the year around the US $200/mt mark, have sunk back from their US $300 range after the Australian floods and logistical bottlenecks reduced supply. Currently, coking coal contracts are trading around US $110.85 for 6,700 kcal/kg at the Newcastle port, while China’s benchmark thermal coal price at Qinhuangdao port also dropped for the first time in three months by 0.6 percent to a range of 845 to 855 yuan (US $133-134.5) for 5,500 kcal/kg.
Thermal prices also hit a high water mark around US $140/metric ton mark early in the year, the highest level since September 2008, with prices on the global COAL Newcastle index at the end of November sliding between the $110 and 113 per tonne range.
With China alone representing nearly 50 percent of global market volume, it is clear their impact will be important in the continued short term profitability of coal producers and traders. While the closing days of 2011 and first quarter of 2012 look to remain rather pessimistic, analysts at UOB-Kay Hian Ltd recently suggested in a recent Bloomberg article that China’s “strong demand and supply tightness should continue to support coal price uptrend in 2012.”
It has been this same continued faith in Asian developing market growth that have kept numerous large-scale producers and traders in merger and acquisition mode to be ready to meet the coming change from emerging markets. Consolidation, particularly in the American market, saw Alpha Natural Resources’s (NYSE:ANR) acquisition of Massey Energy Corp and followed by Arch Coal’s (NYSE:ACI) takeover of International Coal Group in May. Moves were continued later into the summer as Glencore International Plc made a bid to acquire South African coal miner Optimum Coal for approximately US $1.2 billion and Peabody Energy (NYSE:BTU) and ArcelorMittal (NYSE:MT) confirmed their successful bid for Australian miner Macarthur Coal (ASX:MCC).
But as governments worldwide seek to manage the continued growth of their economies, political action in coal markets—seen in 2011 in countries as diverse as Australia, Mongolia, China and South Africa—will continue to be important dynamics to watch. Consulting firm Deloitte released a report warning that a “perfect storm” is converging around mining companies in 2012 as price inflation, commodity price volatility and aching labour shortages are set to through a wrench into numerous mining operations worldwide.
The coal industry is ripe for this very consternation as an industry caught up in the crossroads of global economic growth and rising environmental concerns. If 2011 was any indication of the years to come, coal will be an important commodity to watch.
Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.