Emerging Markets’ Coal Demand Heats Up
by Tony D’Altorio, Investment U Research
Tuesday, November 30, 2010
What’s dirty and out of fashion, but everybody wants it?
That would be coal, both the coking kind used to make steel, and the thermal coal used to fire power plants.
Over the past year or so, coal consumption has climbed on emerging market demand. To the industry’s surprise, it’s been enough to push global prices to a two-year high.
The Wall Street Journal reports that China even worries it may run out of coal someday. So the government may cap domestic output to keep from running down the country’s reserves too quickly.
Intent on meeting that demand, companies everywhere are busy merging and acquiring. In fact, just in the last few weeks, $15 billion in deals have been announced.
That includes Walter Energy (NYSE: WLT), with its $3.3 billion bid for Canada’s Western Coal (PINK: WTNCF). And Caterpillar (NYSE: CAT) spent $8.6 billion buying Bucyrus (Nasdaq: BUCY), which makes mining equipment such as the gigantic excavators used in opencast coalmines.
Those high-priced offers highlight the rapidly rising value of coal assets. Investors should look for that deal making to continue.
Investment bankers think other companies in the sector will want to cash in too. Certainly, even while window-shopping itself, Massey Energy (NYSE: MEE) is considering attracting buyers.
No wonder, too, when there’s so much profit to be made…
Coal Prices Rise as Global Demand Increases
China takes up nearly half of global coal demand and India’s cravings keep rising too. The latter’s coal minister, Sripakash Jaiswal, recently reported that India’s coal intake could triple in the next two decades.
Asia especially needs the coking variety, which had spot prices recently hit $225 a metric ton. That’s much higher than the $85 paid for annual contracts just two years ago.
Mining companies keep searching for new deposits outside Australia and the U.S. But the best they’ve found lately are in problem areas like Mongolia and Mozambique.
And the situation looks even bleaker for thermal coal, despite its greater abundance.
As it fights against illegal mining, China has forced hundreds of smaller mines to close. That and its ever growing need for electricity has it needing more than it can produce.
Soon enough, China will overtake Japan as the largest thermal coal buyer by next year. Its net imports should hit about 122 million metric tons, above Japan’s 120 million.
China’s Demand For Thermal Coal
As China uses more than it produces, it affects the entire thermal coal playing field… With that and Indian demand, even South Africa is giving Asia first pick over Europe.
As a result, European thermal coal prices have hit over $100 a ton. And it’s worse at the Australian port of Newcastle, the world’s biggest port for thermal coal.
Chinese coal demand has pushed prices to a two-year high of $115 a metric ton. That marks a 65% rise from early 2009 lows.
Traders and miners expect Beijing overseas net buying to rise to 100 to 110 million metric tons this year… a full 15% of the total global seaborne coal market! Amrita Sen, coal analyst at Barclays Capital, says, “China’s strong imports are supporting the price of thermal coal globally.”
And Jeff Watkins, head of coal at consultants Wood Mackenzie sees that growth lasting. “The global coal trade,” he recently stated, “will grow significantly during the next few decades, with total thermal seaborne coal demand set to increase from 680 million tons to 1.187 billion tons between 2010 and 2025.”
Negotiations for the annual thermal coal contracts for the 2011-2012 fiscal year, which starts in April, are about to start. Mining executives expect them to be settled at the second highest level ever, just below the $125 per metric ton of 2008-2009.
Fire Up Your Portfolio
This all works out perfectly for the world’s top coal producers and their investors.
- That includes Peabody Energy (NYSE: BTU), BHP Billiton ADR (NYSE: BHP), and the world’s largest thermal coal producer, Xstrata (PINK: XSRAY).
- Certain ETFs should benefit as well, including Market Vectors Coal (NYSE: KOL). The fund devotes nearly half its portfolio to U.S. stocks, about 20% to Chinese coal companies, roughly 12% to Indonesia and 10% to Australia.
- Powershares Global Coal Portfolio (Nasdaq: PKOL) looks well placed too. Much more geographically balanced, it invests 26% into U.S. companies, 20% to Australia, 18% for China, 17% into Indonesia and 11% in Canada.
Any of the above should add a little fire to investors’ bottom line in the years ahead.
Good investing,
Tony D’Altorio
Any investment contains risk. Please see our disclaimer.
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Coal Prices on Rise: Demand from India and China
(Indonesia is Heart of Asian Coal Boom)
By Sunil K Kumbhat, Jodhpur (Rajasthan)
Rising demand of coal from India and China, coupled with global financial recovery, is driving thermal coal prices that have appreciated in the recent past few months and it is expected that the global prices of coal shall remain firm and go up further.
Power generation is what is driving the demand of coal in India and China. In India new coal-fired power plants, ranging in the size from 50 MW to 4,000 MW, are being built throughout India. Power plants are symbol of how rapidly India’s economy is expanding.
Similarly China, shall remain a net importer of thermal coal for coming few years as it’s economy is growing at firm speed and is expected to deliver mind-boggling growth in 2011. China’s coal imports more than doubled to 150 million tonnes from the previous year. Closure of smaller mines, coupled with increased demand from power sector, has triggered China’s demand for imported coal.
India has also emerged as one of the major importer of coal. The imports are likely to be around 100-150 million tonnes for the current year as it adds new thermal capacities. India imports about three-fourths of its coal requirement from Indonesia, while South Africa and Australia accounts for the rest.
The quality of Indonesian coal is much better than Indian coal. The gross calorific value of Indonesian coal ranges between 5,000 and 6,500 kilo calories per kilogram (kcl/kg); while for Indian coal it is only 3,000-4,500 kcl/kg- with high ash contents. Bulk of the imported coal in India is used by power companies, which use it to blend with the local coal to improve calorific value. The coal prices also depend upon the ash content and the calorific value.Indonesia’s strategic geographic location makes it the most preferred country for Indian companies for its proximity to the country, which means lower ocean freight charges and better timing compared to other countries such as Australia.
Indonesia’s coal Industry has transformed itself from being an minor player in Asia’s coal market to the world’s largest exporter of steam coal. Indonesia has come from nowhere to challenge Australia as the world’s largest exporter of thermal coal and is expected soon to topple Australia as the largest coal exporter. The higher energy demand in India would drive up import of coal.
The overall energy generated in India could double within a decade.
Indian power sector will be heavily depend on coal for decades to come. At the same time, India’s steel industry, also dependent on coal, is expected to treble its output within a decade.
But there is growing concern about where all the coal is going to come from. India has significant coal reserves suitable for power generation and boasts the world’s biggest coal company – the government-owned coal India Limited. But the expansion of the Indian economy has been so rapid, demand is outstripping domestic supply.
The government wants the economy to expand at 9-10 per cent a year to help lift millions of poor families out of poverty. But an energy supply crunch could compromise that growth target.
India has theoretically significant reserves but it will take a long time to get into actual production, There is a urgent need to re-examine the regulations and policies associated with exploration, exploitation and production. India is still not fully encouraging commercial coal mining by the private sector.
India’s coal reserves are concentrated in the eastern states of Orissa, Jharkhand, Chhattisgarh, West Bengal and Madhya Pradesh, where basic logistics infrastructure (such as ports and railways) is lacking. Various government regulation concerning forestry and environmental restrictions are also hindering mine development. Unless such bottlenecks are addressed, growth in domestic coal production could be difficult.’
Due to government regulatory delays, infrastructure bottlenecks and security risks are encouraging Indian firms to look overseas to secure coal supply especially in Indonesia, South Africa, Mozambique, Australia etc. for their ambitious power projects in India.
Indonesia’s thermal coal mines have a comparative advantage over Australia’s because they are nearer to India but Australia’s reputation as a reliable supplier is attractive to Indian buyers.’ Australian mines might be more expensive but they are reliable. Australia’s advantages are that the coal is good and the infrastructure is good’
In spit of all, Australia will face stiff competition from Indonesia – which has lower transport costs. A significant proportion of coal transport in Indonesia is water based, which allows for coal to be transported along rivers via barges to the open sea for loading onto larger vessels. Indonesia’s coal suppliers rely heavily on floating transhipment facilities due to economic reasons.
Indonesia’s coal Industry has transformed itself from being an minor player in Asia’s coal market to the world’s largest Exporter of Steam coal.Indonesia has come from nowhere to challenge Australia as the world’s largest exporter of thermal coal and is expected soon to topple Australia as the largest coal exporter.
Indonesia’s government needs to accelerate reforms for foreign direct investment (FDI) in mining and energy sector to give direct control to foreign investors, in order to win confidence and attract/invite major international companies into Indonesia. There is need of more coordination between Ministry of Energy and Mineral Resources Deptt, Indonesian Investment Co-ordination Board (BKPM),and Various Regional administrations.
The phenomenal growth in Indonesia’s coal exports in last five years reflects the ability of its coal industry to respond to the rapid growth in Asian demand for thermal coal.
Indonesia has huge coal reserves and exporting coal to many countries for use in power plants for generating energy but it is paradoxical that Indonesia is short of energy. Many Indian companies (Tata, Reliance, Jindal, L&T, Monnet, Adani,Essar etc) are capable of sharing power technology and setting up mega power plants in Indonesia
Indonesian private companies can buy equity stakes in Indian power plants in exchange / barter for long-term coal supply. Since India is today one of the fastest growing economies and also has a shortage of power supply then such deals can be beneficial to both parties.Indonesian government or Indonesian companies can invite coal barter bids (CBB),where from foreign companies for development of ports, Roads, Railway lines, Power Plants etc. In coal barter bids, coal will be supplied to party who will set up Power plants or develop infrastructure etc. coal mining in Indonesia can be an extremely lucrative sector for overall economic growth. Indonesian government should make single window clearance system to operate business in Indonesia to encourage foreign enterprises and Investment for coal barter bids. Indonesian coal companies are fully aware that India is a market into which they can export or thru barter transactions, its major share of coal Production. Today Indonesia has stable economic outlook and if reform efforts towards basic infrastructures continues it may become Economic Tiger of Asia by 2012. Today Indonesia is the heart of the Asian coal boom.
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