Fierce demand growth for coal in emerging Asian economies will continue driving the fuel's price to new long-term record highs, says Gerard McCloskey, head of coal information provider McCloskey Group Ltd.
Rapid economic growth primarily in China and India will push global demand for benchmark steam coal up to 800 million tons a year in 2009 from 589 million tons in 2007, McCloskey forecasts.
"High price levels will continue. Asia will be the crucible of growing demand...major investments are going to be needed," to match demand in economies that use coal for power generation and steel production, McCloskey said at a recent industry conference.
The Northwest European steam coal marker price surged through $150 a ton this week, double the price from a year earlier, according to McCloskey Group's coal market report, which is widely used as an industry price reference. Prices are now headed toward $160, said John Howland, editor of McCloskey's coal report.
"Freight is booming, Asia's very bullish again and we are seeing utilities in Asia looking for higher-quality...material which isn't available," Howland said.
Coal may be spurned in many industrial economies for being a major pollutant but behind its "undeniably dirty face" lies massive opportunities for investors as global energy supplies tighten, McCloskey said.
"The coal industry hasn't got political support and it hasn't got strong leadership...coal's only moderately more attractive than the plague," McCloskey added.
But political unpopularity hasn't stopped developing nations from using coal to power their engines of economic growth, especially as supplies of oil and other energy sources tighten and become more expensive.
"Coal has got to be part of the solution," for future energy supplies, McCloskey said. He added that with coal being a cheap, plentiful energy source that is indigenous to regions with strong energy demand, these factors will support its long-term price rise. In contrast, crude oil, another energy-dense hydrocarbon, is expensive, difficult to extract, controlled by a cartel of producing nations and located in some of the world's most unstable regions, McCloskey said.
"(Coal) provides security because largely it is located outside OPEC," he added.
Despite its appeal in high GDP growth regions, the international coal market is expected to come under strain as underinvestment and supply shocks rein in production growth in the top coal-producing countries: China, U.S., India, Australia, South Africa and Russia.
"We still see problems with the Australians being able to build their railways and ports fast enough to keep the market supplied," McCloskey said.
Meanwhile, the market will be further constrained as the quality of available material declines. The supply outlook for Asian and European markets remains very tight for 2009, with demand forecast to reach a combined 627 million tons from the two regions. Demand growth for Asia is predicted at 19.5 million tons, while Atlantic demand growth is seen at 8.7 million tons.
Burgeoning coal production in Mozambique, Botswana, Bangladesh, Alaska and Columbia could help ease the supply crunch a tad, but the industry remains vulnerable to supply-side shocks, McCloskey said.
A powerful earthquake that struck China's southwestern Sichuan province Monday could add further sensitivity to the market. Nearly 200 coal mines with a combined capacity of 14.5 million metric tons a year were affected by the quake, China's National Development and Reform Commission, the country's top economic planning agency, said Thursday.
It was still too early to assess the full implications of the earthquake, Howland said. It's not clear how other areas of the country, including the main coal-producing regions in the north, have been affected by the earthquake, he said.
McCloskey also cited January as an example of the market's "massive" shift to a more bullish supply outlook. During that month, China banned coal exports to satisfy domestic needs, floods in Queensland paralyzed Australia's output and power outages in South Africa cut off electricity to its mines.
In the long term, the "spectacular growth" of coal usage is expected to rise 73% between 2005 and 2030, driven by China and India, said the Paris-based International Energy Agency in its 2007 World Energy Outlook. The commodity will comprise 28% of the world's total energy demand, compared to 25% last year.