Why coal is still red-hot

As China and India industrialise, the demand for steel has increased exponentially. Coal is one of the important raw materials used in the manufacture of steel. Coal prices have doubled over the past year and are expected to spike even further as a power crisis in China combines with supply problems in leading exporting countries to tighten the market. Although various commodities have taken a hard knock of late, the fundamentals of coal indicate that high prices will cont inue to rule for some more time.

Coal is the cheapest form of energy for power generation, which is reflected in the large amount of new built plans for coal in many countries. Almost 80 per cent of Chinese electricity generation requirements rely on coal.
The Chinese power crisis is likely to be a major driver of the global coal market in the near-to-medium term. In addition, many traditional exporting countries, such as Indonesia, the world’s largest exporter of thermal coal, South Africa or Poland are increasingly relying on domestic coal supplies for power generation, thus adding to supply-demand disequilibrium.

Coal prices are also expected to find support from Chinese government’s efforts to shut more than 4,000 small coal mines and reduce their numbers to below 10,000 by 2010 from 16,000 currently in hopes of reducing the number of deaths by accidents.

The world coal market had been expecting that record prices would trigger an improvement in supply, but supplies from the main coal exporting nations have fallen this year. China produces a large amount of thermal coal, but most of this output is consumed domestically. The country’s energy market is distorted by government price controls that have reduced the incentives for coal producers to lift output. The net result is that China’s next exports of coal have sunk by more than half over the past four years and the country even became a net importer in April 2008, putting a significant strain on supplies in Asia.

European utilities too could begin to feel the impact soon as Poland and Russia have reduced their coal exports to Europe, exacerbating the shortages. There is not much time for restocking before the start of Winter 2008.

Sify