Cutbacks by China hammer coal prices amid slowdown

Cutbacks by China hammer coal prices amid slowdown

Houston: A few months ago, coal was riding high alongside oil and natural gas, in demand with lofty prices. But like the other fossil fuels, coal prices have fallen amid the global economic crisis and shrunken demand even from its biggest fan, China.

“China matters because China is the world’s largest producer and consumer of coal," Pearce Hammond, an analyst with Simmons and Co. International in Houston, said on Tuesday on a conference call about the state of the coal industry.

He said demand weakness stands out in China, which became a net importer of coal last year, because its industrial production rose by 8.2% last month, the smallest gain in seven years. In September, that production rose 11.2%, Hammond said.

But most alarming, he said, is a 17% drop in China’s crude steel output, signalling a significant contraction in demand for metallurgical coal, the kind used to make steel. The kind used to generate electricity is called thermal coal.

In addition, Hammond said, US President-elect Barack Obama and the increased Democratic control of Congress will present challenges to the industry in terms of carbon dioxide emissions regulations and a possible nationwide renewable portfolio standard, a requirement that electric utilities generate a specified amount of power from renewable sources.

The price of Central Appalachian coal on the New York Mercantile Exchange has fallen to less than $80 (Rs4,040) a tonne from its July peak of $143.25. Simmons said the price of coal first made a notable jump in 2004 when it doubled to $60 a tonne.

China’s hunger for coal had been a boon for US coal exports because it added coal generation capacity equivalent to the UK’s electricity grid last year and nearly that much in 2006.

Hammond said the outlook for US coal exports has become “very opaque" as China is using less and stockpiling more. Another factor is an 80% fall in global shipping rates, which allows coal from Australia to be transported farther and compete in markets where US exports thrive.

Francisco Blanch, an analyst with Merrill Lynch and Co., said in a report to investors this month that growth in global coal consumption in recent years has been generated entirely by emerging markets such as China, while use in more developed countries remained steady.

But a global downturn in construction has reduced steel prices by 40%, leading steel producers to cut output, Blanch said.

“The reduction in steel production has a twofold impact on coal markets. Given that it is a very energy-intensive process, it reduced the amount of coal that is needed as an input fuel. Moreover, as production of metals and steel declines, metallurgical coal will be looking for new buyers," he said.

Thermal coal demand is down as well. Blanch said power production in China, which gets most of its electricity from coal, has fallen to negative 4% from 19% growth at the beginning of 2008. “The dramatic weakening in global economic activity, the steep falls in steel production, and the sharply lower power generation in Asia certainly do not bode well for coal demand in the first half of 2009," he said.

Simmons noted in a report that US coal demand reacts more to weather than economic downturns.

From 1973 through 2007, coal demand compared with the previous year fell in 1982, 1986, 2001 and 2006.

© 2008 / The New York Times