Coal In The Hole

Here I go again, aggrandizing the commodity, and the media hasn't got a way of losing it either. For the past few weeks, coal has been on the headlines of financial and energy stories. Prices have already surged past US$ 125 per metric tonne in Newcastle Port, Australia (a benchmark for Asian coal prices) in the week ending Feb 8th. The media hasn't been too comforting about it either, all the news reports ranting about how bad the supply constraints are, that miners literally are on their knees when it comes to answering customers' demands. Coking coal, used primarily for making steel, is predicted to jump beyond US$ 200 per tonne. There have also been rumors that an Asian steel company had paid a miner US$ 275 per tonne for coking coal, more than double last year's price.

Looks like, at this point in time, the whole world is scrambling for the same stuff the British were after almost a century ago. With countries ramping up domestic power capacity (coal-fueled) by some tens of Gigawatts, hundreds in China's case, to the already existing capacity, supply will get even more squeezed. And thanks to the recent extreme upscale of crude oil prices, we are all now fighting for the ultimate alternative: coal.

South Africa, one of the world's largest exporter of thermal coal, was hit by a devastating power crisis for the past few weeks, as coal-fired plants were running way beyond maximum capacity and literally couldn't handle the pressure anymore. The government is declaring an emergency which leads to closures of coal-delivery ports, halting exports to a crawl.

Indonesia, the largest single exporter of coal, can't off-take enough to satisfy the hunger as mines are already maxed out in production capacity. Bumi Resources, the largest Asian coal miner by asset size, corporate secretary, Dileep Srivastava, said in late January coal prices may well soar beyond the US$ 150 per tonne mark in the short-medium term time-frame.

The lack of infrastructural investments in railways and ports (so are heavy equipments such as barges and conveyers) around the world adds another heavy straw to the camel's back. Ships waiting to load, are backed up for months in Newcastle, Australia's biggest coal-loading port, which worsens matters and shows problems are not likely to dissipate in the near future due to the prolonged bottlenecks. Floods in the country (Australia plays a pivotal role in the coal supply chain as it currently holds the number two position in total export volume) have also squeezed the already tight market and increased the demand for coals from regions like Western Canada. Grande Cache Coal, a miner based in Calgary, has doubled its share price in the past week alone, closing at US$ 3.30 on Friday, Feb 8th.

Adding insult to injury, China is experiencing the worst winter in 50 years. Snow-blanketed roads and highways make it impossible to transport coal from the northwestern states of the country (that's where most of the coal deposits are) in time to supply China's 80% of power plants that run entirely on coal. Power coal supplies fall eerily to an all-time low of 4 days, where the suggested threshold level by the government is 3 weeks. China has also cancelled, and broke contracts, coal shipments to Japan and South Korea, who were obviously enraged by Wen Jiabao, the Chinese Premier's public statement to cut its exports entirely to those countries (in effect, China is halting all coal exports to every other country) starting early February. On receiving the news, the heads of state of the two countries scurried to get their hands on future binding contracts from Indonesia or India, and my guess is, with limited results.

In a related story, the world's largest miner, BHP Billiton, has upped the ante in an attempt to takeover long-time arch-rival Rio Tinto, part of the reason was to increase its stake in coal deposits. The acquisition, if successful, would bring about the largest coal deposit owned by a single company. The almost hostile bid came amidst surging coal prices, with Rio Tinto asking a far above premium to the current stock price.

Coal: The Other Black Gold

With oil prices surging well around the US$ 100/barrel mark, it's obvious oil-dependent industries such as those of power plants are looking into alternative sources of energy. They desperately need to be able to generate power using alternatives such as natural gas, and coal. Of the three main energy commodities, coal is the least expensive (behind natural gas and oil). As you might have expected, coal is the most abundant and it's worth noting that coal prices have surged threefold in 2007 alone.

China, for example, is hastening towards the launching of hundreds of new coal-fired power plants (roughly two in every week), and the US is doing the exact same thing, only on a different time frame. Why the move? Coal-fired plants generate 26% of the world's total energy output and coal is still reasonably cheap at around US$91.50/metric tonne (contract prices; and well above US$100/metric tonne for non-contract prices) compared to crude oil which is currently running at US$92/barrel (although the power generated per volume falls behind that of oil). But the commotion is that companies in emerging economies are scurrying forward to grab significant cuts of the pie in overseas mining companies (securing future contracts, thus supply, for years ahead). Consequently, China had stopped exporting coal in 2006, becoming a net importer of the commodity. This is the beginning of a major phenomenon, as China, being the fastest growing economy in the world (over 10% annual GDP growth, unofficial figures), with a population of well over 1.3 billion people, is desperately seeking to satisfy its hunger for commodities that are crucial in laying the foundation for its breakneck growth as an emerging world power. Essentially, It is on the blazing trail to energy addiction just like the US was decades ago. Today, the US is the world's biggest energy hog, consuming an alarming 30% of the world's total energy output. India's largest corporate group by asset size, Tata Group has been scrounging countries like Indonesia, Thailand and Vietnam for coal contracts and in early 2007, it even bought out a 30% stake of Kaltim Prima Coal and Arutmin mines wholly owned by Bumi Resources, Asia's largest coal miner based in Indonesia, for a reported value in excess of US$ 1.6 billion. The indication is clear, those with the liquidity to go forward and secure contracts would have done so hastily. Adding to the pandemonium, analysts are predicting it is becoming "the energy of the future", just as it were almost a century ago, when England turned its back on wood in favor of coal for the generation of thermal heat energy. How would these affect world coal supply? As supply can't be increased substantially overnight, prices would therefore automatically shoot skyward to cope with the torrential demand. Meanwhile, China is aggressively fighting for the lion's share of the commodity, sparking off worldwide explorations (and acquisitions) by dozens of Chinese companies, stretching from Africa to South America (China has been operating around 500 mines the past decade in the African continent alone). This ambitious search and exploration for more and more coal, has received the unsolicited attention of others, attracting inflammatory rantings from UN members saying China is staged to become the world's biggest polluter and emitter of greenhouse gases. I'm not going to go into the details of such issues: global warming and climate change. I'm emphasizing on coal as the other black gold as a commodity. Notwithstanding, China maintains its increasingly high consumption of coal, with miners digging almost 24-7 around the country (high death toll might also be the major contributing factor for criticism from the West blaming China for not doing enough to step up safety measures). And thanks to severe bottlenecks in coal delivery from Australian mines to its ports, due to the unusually heavy volume of rain, and shortage of railways and train carriages, prices have surged steadily for the past two years. Both China and India have been neck-and-neck in finding and discovering new mines across the globe especially in equatorial regions which are fertile grounds for coal explorations and excavations. Coal deposits in countries closer to the equator are said to be of prime quality in comparison to those found in the temperate regions of Russia and China.

As for an investment advice, look out for companies in the likes of Peabody Energy Corp in the US, and Xstrata Plc in the UK. These companies posted record annual gains (again, thanks to the skyrocketing coal prices and severely tight supply of the commodity in the world market right now). Do your own research, and invest in these companies. If you're smart and clear-headed enough to take on investments in coal-related companies (miners, contractors etc), then you'll reap the benefits of doing so well beyond your imagination.