Hot coal to rally more, but cheaper than in 80s

Hot coal to rally more, but cheaper than in 80s

London: Record coal prices have plenty more room to rise in their demand-led rally as the fuel is still cheaper in real terms than in the 1980s, those in the industry say, with costs to be passed on to electricity consumers.

“We’re going back to the prices of the late 1970s/early 1980s in real terms but the difference this time is that demand is surging and we’ve got a genuine coal shortage," said Jim Lennon, metals and mining analyst at Macquarie Bank.

Both buyers and sellers agree that for the first time in their memory, they could not see where prices would peak.

“This market is genuinely tight," a buyer with a large European utility said.

“It will take probably several years before there is enough new supply to meet demand and in the meantime, it is impossible to predict prices or say where the peak will be reached. Meanwhile, power prices must rise," he added.

“There have been problems this year with production at just about every coal exporting country, which just made the situation worse," one trader said. “All of them — Russia, Indonesia, Colombia, Australia, even South Africa."

Production hiccups exacerbated the tightness and helped accelerate price rises but the fundamental driver behind this year’s record coal prices has been a shocking rate of demand growth in Asia, analysts said.

The two most commonly referred-to coal price benchmarks are CIF/DES Amsterdam-Rotterdam-Antwerp (ARA) and free-on-board Richards Bay for widely-consumed South African coal.

In January 1981, adjusting for inflation, coal prices in todays terms were $128.00 a tonne CIF Europe and December prices were $160.00. FOB Richards Bay prices in December 1981 in real terms were $113.00 a tonne, Lennon said. “We’re getting very close to those levels now."

Prompt CIF/DES cargoes hit a record $130.00 last week and are widely expected to reach $150.00 by the end of December, having begun 2007 at around $65.00 a tonne.

South African prompt loading cargoes were trading at $47.00 a tonne FOB in January but this week sold three times at a record $82.40 a tonne FOB Richards Bay and could reach $100.00 by the end of the year, some buyers said.

Costs passed on

In recent years European utilities have insisted they could not generate at a profit with coal costing over $75.00 a tonne CIF.

Indian traders this year claimed that no Indian consumer would pay more than $50.00 a tonne FOB Richards Bay for South African coal. But India is expected to import around 10 million tonnes from South Africa, priced between $50.00 and $83.00 FOB.

“Only when demand slows will we see any return to normality," said Brian Ricketts, coal analyst at the International Energy Agency.

“There were coal price hikes after both world wars and again in the 1970s. In all cases the price hikes were demand driven, in contrast to the oil shocks of the 70s," Ricketts said.

Within reason utilities can simply pass on these price rises but where there is room for additional gas-fired generation there will be a competition to be played out, he said.

They said it will take time for higher coal prices to fully factor into higher electricity tariffs for the consumer because they are still receiving term coal supplies at much lower prices than spot.

“This situation is very inflationary. There will be problems ahead for many countries if generators’ margins stay the same and extra costs are just passed onto the consumer," a source at a major UK utility said.