by Tony D’Altorio, Investment U Research
Tuesday, February 8, 2011
Oil has stolen the headlines recently thanks to Brent crude trading above $100 a barrel. But it’s still well below its record high.
Not so much with thermal coal – yet energy investors too often favor oil and natural gas over this resource.
That’s their loss, considering how thermal coal is one of the world’s most valued commodities. It fires power stations everywhere, with Asia especially relying on it.
This month, Asia’s utilities and coal mining companies will be holding their secretive, annual talks. Those extremely important meetings set the annual fixed prices for thermal coal April-March.
Catching Up On the Thermal Coal Market
The thermal coal market moved to spot trading in the early 2000s. But most of the large mining companies still keep annual contracts with utilities in Japan, South Korea and Taiwan and elsewhere.
Annual contracts set the price directly or indirectly for about a third of the 730 million metric ton seaborne thermal coal market. And they also set the tone for the spot market.
The industry expects record prices for these new contracts well above the 2008-09 peak of $125 a ton.
The estimates for the annual coal contracts range from a low of $130 a ton to a high of $145. But either way, it will be far above the $98 set last year.
Weather Disruptions Force Thermal Coal Prices Higher
Thermal coal prices quietly trended higher after the 2009-10 annual contracts were set at a mere $71 a ton. But recently, the market has taken a powerful shot of adrenaline.
Prices have jumped sharply amid supply disruptions in key coal exporting countries, such as Australia. Spot prices shot up to $140 in early January, though they have fallen back since to about $125.
Australia’s coal-rich state of Queensland keeps getting pounded with heavy rains and tropical cyclones. Meanwhile Indonesia, Columbia and South Africa have suffered under similarly bad weather.
Emmanuel Fages, coal analyst at Societe Generale, summed up the global outlook: “There seem to be rains in every place where coal is produced these days.”
Plus, a severe shortage of railway cars is hurting output in Russia, another large thermal coal exporter.
Rebound in Demand for Thermal Coal
The disruption to global coal supplies has coincided with a rebound in demand for the thermal variety.
On the demand side, the traditional big three Asian markets of Japan, South Korea and Taiwan have increased buying on the back of stronger economic growth.
Meanwhile, India and China have recently emerged as major thermal coal buyers. Together, they imported 190 million metric tons… up an astonishing tenfold from 2003!
The surge in Chinese buying comes largely on the back of a clampdown on illegal and unsafe mining. Many such smaller mines are now closed permanently.
Transportation bottlenecks also did damage, forcing China to import even further.
Take last summer’s 60-mile traffic jam that lasted two weeks. Its main cause was road construction, which backed up a huge number of trucks…
And those trucks just happened to be transporting coal from Inner Mongolia to other parts of China due to a lack of rail transport to handle the job.
India is also buying more of the commodity in order to fire a new generation of large, coastal plants as it expands electricity production. It is expected to import 20% more coal in 2011 than in 2010.
Thermal Coal Investments
The world’s largest thermal coal exporting countries, based on 2010 estimates, are:
- Indonesia at 198 million tons
- Australia at 146 million tons
- Russia at 94 million tons
- Columbia at 74 million tons
- South Africa at 65 million tons
- The U.S. at 22 million tons
Investors should stick to companies that have output in these countries. Global mining giants such as Xstrata ADR (PINK: XSRAY), the world’s largest exporter of thermal coal, make that task easy.
PowerShares Global Coal Portfolio (Nasdaq: PKOL) also stands as a solid choice. The ETF allocates much of its assets to coal companies based in countries like Indonesia and Australia.
These investments should help keep investors’ portfolios warm in the months and years ahead.