If there is any commodity more fundamental to the Chinese economy than iron ore, it’s coal. Responsible for the haze you can see over most Chinese factory towns, China consumes one-third of the world’s coal, which accounts for 68.7 per cent of total power output in China, compared to 49 per cent in the also coal-dependant US.

Last year, a combination of a jump in international coal prices and government price fixing threw numerous coal plants and mines into the red. Many low-tiered cities were stuck with rolling blackouts as several power producers decided to go offline, but since July 2008, the price for thermal coal has dropped from around USD 190 per ton to under USD 90, and most of the major power producers are now back in the black.

That could quickly change though. Like in metals, smaller coal-mines have been closed down because of the financial crisis, and many have yet to reopen, but demand has started growing strongly, with electricity use up 4.7 per cent in July from a year earlier, after having lost 4.5 per cent in the first quarter.

Coal is heavily linked to other commodity prices, most notably in its use during steel smelting, and coal prices have now risen 30 per cent from their low in March.

“For the second half of 2009, there are still risks of tight coal supply,” said a statement from Huaneng Power International, one of the big five power companies in China, during its first-half meeting report. “As we have not signed coal contracts, the coal market is still fraught with uncertainty and instability. Coal supply and the price of coal could present new problems and challenges.”

The biggest electricity producers in China have a contract system in place with domestic coal producers similar to the international one for iron ore. And they have also been slow to come to an agreement, with power producers looking for a 4 per cent hike – or flat after tax effects – and mine owners asking for a 17 per cent increase in price.

Though some negotiations have been resolved in the power producers favors, the vast majority – including those with coal-rich Shanxi Province mine owners – have not, and the power companies are also being forced to buy on the spot market to make up the difference.

Coal is one commodity that there is no long-term shortage of – China has enough for the next 100 years – but there are still numerous short-term issues that could make mine owners rich while making power
providers poor … or vice-versa.

Higher imports

However, Australia has seen higher Asian thermal coal imports. Strong demand for thermal coal in China and India is expected to help Asia avoid the first fall in imports for a decade this year, and push import growth even higher in 2010, an Australian government forecast showed on Tuesday.

In an updated quarterly forecast, the Australian Bureau for Agriculture and Resource Economics (ABARE) said demand for imported coal in Asia would rise by 13.6 milion tonnes, or 3.5 per cent, to 401.6 million tonnes in 2009.

Thanks to improved regional demand and new port capacity, ABARE has significantly upgraded Australia’s thermal coal exports, estimating it to increase 2.6 per cent from a year ago to 140 million tonnes in 2009/10. It had expected Australian exports to fall 6 per cent to 122.5 million tonnes in 2009/10 in its June report.

“Over the course of 2009, thermal coal demand in the Atlantic market has been weak, while demand in the Asian market has remained relatively strong, underpinned by increasing imports into China,” ABARE said in the report.

Chinese capers

In China though, no one expected the financial crisis to be the end of Chinese steel demand, and the Chinese government, as well as many private producers, have used the low international commodities prices as an opportunity to restock after years of high costs.

“Many domestic producers have arbitraged the low offshore prices [with higher onshore prices],” says Ben Simpfendorfer, head China economist at Royal Bank of Scotland. “This has made demand look stronger than it was in China,” he added, warning that he expects a correction in the next one or two months, both due to the end of restocking, and to the regular slowdown in commodities demand that comes every summer.

Simpfendorfer and other analysts note, though, that once demand evens out, numerous supply problems still constrain most commodities. Metals, in particular copper and nickel, will be expensive in the coming few years, according to Simpfendorfer, as mines are slow to reopen and exploration of resources gradually picks up again after stagnating through the crisis.

The domestic coal industry intends to significantly increase production, the decreasing need from China’s imports may change the increasing coal price for more than five consecutive months.

After the coal imports set a record of 48 million tons in the first half year, China’s coal imports in July surged by 13 per cent to 13.9 million tons. It is expected that the largest coal-producing province,
Shanxi’s output will be up by 60 per cent, rising 150 million tons, which is almost two times as Germany’s one-year consumption.

Due to the decline in China’s imports demand, the international coal price will go down, and coal price in Europe will slide by 7 per cent, analyst predict, adding that in the second half year, China’s imports demand will glide by 33 per cent.

Grim scenario

Other analysts too maintain that China’s unprecedented appetite for imported coal is about to be sated, jeopardizing a five-month rally in prices by adding to a global surplus of the fuel used in power plants from Perth to Chicago.

“In the first half, China really supported the market and put a pretty firm floor under the thermal-coal price because it was sucking in so many imports,” said Andrew Harrington, an analyst at Patersons Securities Ltd in Sydney. “It’s difficult to be confident that it will continue at such a rate.”

China’s July coal imports fell 13 per cent to 13.9 million tons from 16 million tons in June, a record high, customs data show today. Demand from China, which uses coal to generate about 80 per cent of its
electricity, helped ease a global supply glut that sent US inventories to an 18-year high.

Earnings Hit

A retreat in prices may curb profit at Xstrata Plc, the mining company that is the biggest shipper of coal for power stations, said Nick Hatch, an analyst at ING Groep NV in London. Coal was the biggest contributor to operating earnings last year for Zug, Switzerland-based Xstrata, which boosted output of the mineral by 11 per cent in the first half.

“If China stops importing as much coal, it clearly may mean lower coal prices in the seaborne market, and that could have an impact on earnings,” said Hatch, who has a “buy” rating on Xstrata and mining companies Rio Tinto Group and Anglo American Plc, which also produce coal.

Six-month supply contracts signed by Chinese buyers in February and March are expiring and aren’t likely to be renewed at the same amounts as global costs remain high and as domestic supplies rise, said Huang Teng, the general manager of Beijing LT Consultant Ltd, a coal consultant based in the capital city.

Chinese provinces are accelerating the expansion of coal mines, the China Coal Transport and Distribution Association said. The reopening of small mines in regions including Shanxi will increase supplies and put pressure on prices. Coal futures for September delivery at Rotterdam, the benchmark for Europe, have risen 39 per cent to $72 a ton on August 21 from this year’s low of $51.75 on March 12. Prices rebounded from a 35 per cent decline last year, when the recession slowed demand for electricity. Supplies
for delivery in January are trading 7.6 per cent higher than the September contract.

Extraordinary measures

“Price momentum and volume momentum are so strong, it’s difficult to see why the price should go down,” said Eugen Weinberg, a senior commodity analyst at Commerzbank AG in Frankfurt. “Measures to initiate demand are extraordinary.”

Drax Group Plc, the owner of western Europe’s biggest coal-fed power plant, has no plans to sell its surplus inventories of the fuel because the North Yorkshire, UK-based company expects the value of the commodity to increase.

“We see the coal market rising,” Chief Executive Officer Dorothy Thompson said on an August 4 conference call with reporters. “It does not make sense to sell coal now.”

US inventories

In the US, inventories jumped 15 per cent in the first four months of the year, compared with a 1.1 per cent gain in 2008 and 2.4 per cent in 2007, Department of Energy data show. Stockpiles at the end of last
year totaled 199.2 million short tons (180.7 million metric tons), the highest since 1991.

Global supply of internationally traded thermal coal is forecast at 633 million tons next year, exceeding demand by 14 million tons, according to forecasts from Macquarie Group Ltd., Australia’s largest
investment bank.

St Louis-based Peabody Energy Corp (NYSE: BTU) sold 16 per cent of its coal production outside the US last year. The company’s sales outside the US climbed 30 per cent to 40.3 million tons, outpacing total sales growth of 8.2 per cent to 255.5 million.

“China has been an indirect market” for the US, said James Rollyson, an energy analyst at Raymond James Financial Inc. “It’s soaked up capacity from Australia, so it kind of makes waves into other markets.”

MacQuarie reiterated its bullish stance on the US coal sector and all companies exposed to coal, upping its earnings estimates for all coal producers under coverage while retaining the “outperform” rating for the sector. “We believe spot price direction is going to be the key for coal equities over the next few months as well as data flows from China. We expect generally weaker earnings for domestic coal companies in 3Q as
thermal demand remains very weak and improvements in coking coal fundamentals are expected to drive more meaningful upside to numbers in 2010,” said MacQuarie.

The price target for Alpha Natural Resources (NYSE: ANR) is set at $40, while the current price stands at $37.08 per share. Massey (NYSE: MME)’s price target was upped to $32 per share, while its current share price stands at $31.96.

International Coal Group, (NYSE: ICO) has said that its ICG Addcar Systems, LLC subsidiary, Ashland, KY, has acquired certain international patent rights that substantially expand its ability to manufacture and market its Addcar highwall mining system beyond North America. Key coal-producing countries added to the ICG Addcar marketing area include China, Russia and South Africa. The international patent rights were purchased from Addington International, LLC for an undisclosed sum.

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By Kishori Krishnan Exclusive To Coal Investing News

After a dark winter for Canadian coal producers, spring supply contract negotiations halfway around the world are providing a glimmer of light at the end of the mine shaft. As news of the pricing agreement filtered through the market last week, Canadian coal stocks have reaped the benefits.

BHP Billiton Mitsubishi Alliance and Nippon Steel Corporation have reportedly settled on a price of US$128 tonnes to US$129 tonnes for coking coal for the 2009 Japanese fiscal year, which begins next month. That was far above the levels of less than $100 a tonnes that the market had feared early in the negotiations and even topped initial rumors of a $115 to $125 price settlement that leaked into the market last week.

While the result is less than half of fiscal 2008′s record price of $300 a tonne, it still points to one of the best years ever for coking coal prices and implies that Canadian coking coal producers could enjoy a better than expected year.

Daniel Brebner global mining analyst of UBS Securities said that “In our view, there is little other way to describe the outcome other than as a significant victory for mining companies. Despite one of the worst economic periods experienced in living memory, with considerable deflationary pressure, coking coal prices have been settled at their second highest level ever recorded in nominal terms.

Patricia Mohr vice president and commodities specialist at Bank of Nova Scotia said that the contract settlement suggests a price of about US$126 per tonnes to US$127 per tonne for Western Canada’s premium hard coking coal still above the peak of US$125 in 2005.” She said that “The price negotiated is lucrative compared with operating expenses.”

The improved pricing outlook prompted UBS’s MacArthur to raise his 12 month price target on Teck to USD$9 from USD$5 and ramp up his 2009 earnings forecast to USD$1.47 a share from 28 cents. Still, he cautioned that Teck’s debt problems remain a threat to the company. He said that “Even with the higher hard coking coal forecast, we believe that Teck will be challenged to meet its debt obligation without changes to operations, asset sales and/or other financing,” according to GlobeInvestor.

Chinese capers

According to a report by Reuters, China’s top coal miner China’s Shenhua Group has struck a 5-year supply deal for 85 million tonnes of coal while rival China Coal has suspended a $2.5 billion project because of the global financial crisis. Shenhua has agreed to offer state-owned conglomerate China Resources Group 85 million tonnes of thermal coal over the next five years, the Xinhua news agency reported on Saturday, citing an agreement between the firms.

Both companies promised to keep the price “relatively stable” and company representatives at a signing ceremony in Hong Kong said the agreement signalled “a strategic draw” after years of pricing games between coal miners and power plants, Xinhua said. But with prices under pressure because of falling power demand, China’s No.2 coal miner China Coal Energy Co Ltd (1898.HK)said it was suspending a 17 billion yuan ($2.5 billion) project in Heilongjiang province.

China’s coal miners are struggling with a downturn in demand from power producers after years of raging growth in the sector. “The supply and demand of coal will become less balanced, coal prices will fall and the reform of value added tax and resource tax may affect the profitability of coal enterprises to a certain extent,” China Coal said in its 2008 results on Friday.

China’s top coal producing province, Shanxi, plans to shut 1,500 coal mines with less than 900,000 tonnes of annual production over the next two years, leaving around 1,000 mines in operation, Xinhua quoted provincial coal mining official Wang Chonglin as saying on Sunday. The miners have yet to lock China’s five big power generating firms into price agreements for 2009. The absence of a deal between miners and power groups has attracted imports in recent months, worsening the oversupply at home.

Chinaesteel reported that Qinhuangdao Port completed coal shipment of 10.34 million tons during the first 17 days of March up by 43.4 per cent month on month from the same period of last month at 7.21 million tonnes equal to 600,000 tonnes of outbound shipment per day up by 41 per cent from daily average of 424,000 tonnes in February.

As of March 18, there were 121 vessels waiting for coal loading in the port, compared to 99 on March 16th and 72 on February 15th. Experts say sharp increase in demand from the thermal power sector in the south is responsible for the rebound.

Brazilian bravado

Brazilian mining company Vale has launched a $1.3 billion (£908.5m) coal mining project in Mozambique, the BBC reports. Vale is the world’s second-largest mining company and the largest producer of iron ore. The new plant is expected to produce 11 million tonnes of coal a year, to be exported to Brazil, Europe, Asia and the Middle East. It is thought Mozambique will now become the continent’s second-largest coal producer behind South Africa, which holds most of Africa’s reserves. Mozambique has attracted increasing numbers of foreign investors recently.

In total, the project is expected to generate 8.5 million tonnes of metallurgical coal, which is used for the production of steel. It will also produce 2.5 million tonnes of thermal coal, which is used for electricity generation, every year.

Mozambique’s president Armando Guebuza said: “We want these resources to continue contributing in a sustainable way to the improvement of the living conditions of our marvellous people.” The news is a boost for African commodities, which have been hit hard as consumers abroad continue to shun high-end purchases in the economic downturn. Commodity prices have also been badly affected by the reduction in demand from China, which once had an insatiable appetite for buying raw materials in order to fuel its now-fading economic boom. Countries such as South Africa, Congo and Botswana have particularly felt the effects of cooling trade in raw materials.

Japan‘s jump

Japan-based Marubeni Corp. is to bid for the independent power producer (IPP) contracts of the 700-megawatt Pagbilao and 1,000-megawatt Sual coal plants the Power Sector Assets and Liabilities Management Corp. will bid out in May. Marubeni is bidding to be the administrators of the Pagbilao and Sual IPP contracts. Tokyo Electric Power Corp., which operates the Sual and Pagbilao, did not join them in bidding.

Marubeni is a major general trading house in Japan, which has been doing business in the Philippines for almost a hundred years with its investments in the power, telecommunications, construction, industrial parks, food-processing and general-merchandise sectors.

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Teck shares sank $4.65, or 13.9 per cent, to $28.92 on the TSX, just shy of its 52-week low of $28. Teck shares were trading near $53 in May.

Analysts said the share drop has more to do with a decline in global metals prices as a result of fears the Wall Street financial crisis will lead to a slumping worldwide economy and reduced demand for metals and other commodities, especially from fast-growing economies in India and China.

For complete story, click this link. To view Teck Cominco’s profile, click here. Follow developments in coal mining and exploration for free. Sign on to the Coal Investing Newsletter.

Welcome to the Coaling Station, your online recap of what’s happening in the global coal industry. We hope to bring readers a new edition twice a week, depending on sector activity.

There seems to be an intriguing trend taking shape in the United States. In the last week, Native American tribes in Montana and New Mexico, Crow and Navajo, respectively, have moved forward towards coal projects on tribal lands.

In New Mexico, it is a point of contention as the state government’s policy prerogatives are limiting greenhouse gases. Though the state government has no direct jurisdiction to stop it, it could conceivably use environmental approval bureaucracy to force the inclusion of emissions-mitigation technology in the plant.

In Montana the state government is fully on board with the Crow Nation-Australian-American Energy Co. venture. The plan calls for both a new mine and a coal-to-diesel conversion plant. Public opposition to new coal-powered electricity is growing in non-producing states, so such tribal ventures offer a unique way to skirt around political concerns, especially in the interior West.

Power news from world-over

* PNM Resources (NYSE:PNM) has abandoned its plans to expand a Texas coal plant in conjunction with Cascade Investments LLC. No reason was given for the pullout.

* Rio Tinto (NYSE:RTP) is debating whether to release its North American coal assets under the auspices of subsidiary Cloud Peak Energy Inc. After its purchase of Alcan Inc., Rio is looking to restructure its operations to fend off BHP Billiton’s (NYSE:BHP) bids at the mining giant.

* W2 Energy Inc. (PINK:WTWO) is to solicit funding from the United States Department of Energy’s Clean Coal Power Initiative for its coal to liquid process. This program is something to look out for, as environmentally-friendly coal projects have huge growth potential. You can check out the companies involved here and see if any of them catch your fancy.

* The government-controlled enterprise Coal India is tendering for washeries. Plans call for 18 new facilities, of which 7 tenders will be launched by December.

* In more news from India, Sail Steel (BOM:500113) and JSW Steel (BOM:500228)are hoping to develop the country’s Jharia mines, “estimated to have over eight billion tons of high-grade coking coal reserves”.

* Thailand’s largest miner, Banpu (BAK:BANPU), has posted strong second quarter results, including a 31per cent profit rise. Profits equivalent to $68 million buoyed the miner by well exceeding expectations.

* The Indonesian coal sector, unfortunately, has been in facing some amount of rough weather as Australian coal benchmarks have slumped. Part of the decline can be sourced to the recent lowering of oil and gas prices, making coal less attractive.

* In Australia, a long running court battle between global giant Xstrata Coal (LSE:XTA) and Australian based Felix (ASX:FLX) over two mining leases in New South Wales has entered a new phase. The state’s Court of Appeal is to rule on the legality of Felix’s ownership of the Moolarben properties. Felix’s shares have apparently lost some investor confidence on the news.

* Italian electricity company Enel SpA (BIT:ENEL) has acquired one tenth of Indonesia’s Bayan Resources in an IPO for $ 223 million. Enel has long been involved in the Indonesian coal sector, and is trying to vertically integrate its operations.

I like to end a news update on a positive note whenever possible, so here is my favourite story of the week. A decade and a half after the end of civil war, Mozambique has announced that it expects exports to resume in 2010, once repairs are complete on the railroad linking its inland coal resources to the Beira port. After a long time, things are looking up for the southeast African country. The nation is well-positioned to export coal to India, especially, but the war had wiped out almost all export infrastructure.

In a sign of how the 21st century is going to fundamentally differ from the previous one, the railroad has been rebuilt with the assistance of an Indian consortium, to help Brasilian and Australian companies access Mozambican coal for export to India and China. So, that’s that – the good news for this week.

If you are lucky, Santa Claus may leave a huge lump of coal in your stocking this year. With near-month futures contracts trading in the $120-$130 per ton range, the formerly shunned fuel is more valuable than ever. Take a look at the second graph here to get an idea of how strongly coal is performing.

The reasons for this are fairly straightforward. First, coal-fired plants are responsible for a plurality of the world’s electricity generation. Second, high natural gas prices (in terms of energy output per dollar) have made coal more attractive for new generating plants, despite its relative inefficiency and associated environmental problems. Finally, rapidly industrializing China and India each have voluminous coal reserves and mediocre natural gas or hydroelectric generation potential.

Aside from electricity, coal has several industrial applications. Though these uses represent a small fraction of global consumption, they include some huge industries like steel making, metallurgical processes, paper manufacture and some chemical processes.

If you are a new investor trying to break into the coal game, there are multiple options. As with other commodities, the investor who craves volatility and the potential for huge gains (and losses) can trade in futures contracts. On the New York Mercantile Exchange there are three different types of futures; Central Appalachian Coal Futures,  Eastern Rail CSX Coal Swap Futures and Western Rail Powder River Basin Coal Swap Futures. If you are in Europe you can trade coal futures on the Intercontinental Exchange with either the Rotterdam or Richards Bay Coal Futures.

Futures trading remains the preserve of a select few investors, so the majority of new players in the coal sector will buy shares in companies. Here again you have several choices. If you are looking for stability and long-term investing, then large coal companies like Patriot Coal Corporation, (NYSE:PCX) Alpha Natural Resources, (NYSE:ANR) Peabody Energy Corporation, (NYSE:BTU) or Walter Industries (NYSE:WLT) are good bets.

Should you prefer more risk but greater and faster profit potential, juniors and venture exchanges can provide. Companies like Coalcorp Mining, (TSX:CCJ) Homeland Energy Group, (TSX:HEG) and others offer low buy-in prices, but are much more prone to failure and/or bankruptcy.

Coal’s global plenitude facilitates diversity in your portfolio. The investor can have a basket of giant, medium and junior or venture companies that operate in Australia, India, the US, Indonesia, South Africa, Germany, Turkey and any combination thereof. Australia’s coal market should be examined with extra care, as an incredible mining boom has overvalued some of the companies.

Although coal has a bad environmental reputation, increasing investments in technologies like coal scrubbing, gasification, flue gas steaming/ filtering and carbon capture and storage may decrease this liability. With enhanced sensitivity to greenhouse gas emissions in developed countries, regulatory frameworks are beginning to punish coal plants more heavily. Canada, the United States and Australia are slightly behind the trend, but tougher laws are expected in each. It is therefore advisable that any investor with a coal-intensive portfolio examine the pollution mitigation strategies of their companies closely.

Though it remains the bête noir of environmentalists, the fuel of the industrial revolution is unlikely to disappear from the world’s energy basket. China is opening a new coal generating plant per week, and Chinese coal production has flat-lined or even peaked. A savvy investor can still make good with coal mining, but keep an eye on the canaries!

Many commodity companies are traded on the TSX

If you are like many people, the last time you read about commodities in the news was when Bre-X Minerals collapsed in 1997, after news broke that the company had falsified results and the gold they had reported was nowhere to be found.

Thousands of investors all over the world lost billions of dollars and the entire junior mining market was painted with that same brush. Stories of past failures were relived and every junior mining company, legitimate or not, was forced to survive without new financing. Many juniors didn’t make it. Much of the financing capability that existed in the junior mining market went onto the greener pastures of junior tech companies just gaining momentum opposite the Internet’s rising popularity.

As a result, very little money was invested in exploration for new mining projects. Commodity prices were low, making a bad situation for explorers even worse. This drought in financing was to last almost a decade, but that didn’t stop the growth of economies in developing countries. Many of those—such as China, India, Brazil, and Russia—have now emerged as economic powerhouses hungry for commodities like never before. Many people see these factors resulting in a long period of demand for new mining projects that are primarily identified by junior resource companies.

Another outcome from the Bre-X scandal was a modernization of the junior exploration industry from a regulatory perspective. The Canadian Securities Administrators (CSA), a forum for the 13 securities regulators of Canada’s provinces and territories to coordinate regulation of the Canadian capital markets, created guidelines for how companies disclose scientific and technical information about what the find when exploring for minerals. Reports not only need to meet these guidelines before being published, but the findings need to be vetted by external, independent organizations who guarantee the reports are real. Guidelines exist for everything a company says about its findings, whether the information is being disclosed in press releases, web sites, advertisements, or via word of mouth.

So, are junior resource companies now safe investments? Many investment advisors would say no. Much like early stage technology companies or pharmaceutical companies, the junior resource company is based around an idea which may or may not become economically feasible when developed. Success of a mine will depend on whether the minerals in the ground can be sold for more than their cost of extraction and shipping to potential buyers. Not only does this depend on the cost of setting up a mine and processing the ore, but also on the market price for the commodity being sold and proximity to the market it’s being sold in. Like so many entrepreneurial situations, myriad things can go wrong.

But the opportunities are also significant. Digging gold out of the ground is something that captures the imagination of many people from a very early age. Significant portions of the economies of countries like Canada, Australia, South Africa, and others are derived from mining.

So as with most investments there are risks and rewards, often in lock-step. Many investors hire experts to manage their money rather than doing the investigation required to increase the chances for success. But to those who decide to go the extra mile and investigate in hopes of finding the next great company: rest assured the mining industry has progressed to the point where regulations and controls mean the information you’re presented with has been reviewed by experts in the field who stake their reputation on its accuracy.

For information on investing in specific metals and minerals, see the Introduction to Gold from the editors of GoldInvestingnews.com, Silver Fundamentals from Silver Investing News.com, the Introduction to Copper Investing at Copper Investing news, the What is Uranium article on Uranium Investing News, the Introduction to Nickel Investing from Nickel Investing News, and the lead investment overview at Intro to Lead Investments from Lead Investing News.