More coal price increases on the way, says senior analyst

25th January 2008 By: Leandi Kolver - Creamer Media Deputy Editor

More price hikes are expected owing to global supply and demand shortages, Wood Mackenzie senior analyst Xavier Prevost tells Mining Weekly.

The coal price started to soar from the $50-t mark in May 2007, bringing the price to the current $100-t mark.
“For only the fourth time in the past 100 years, we are in the midst of a significant coal price hike, this time driven by strong demand,” says International Energy Agency energy analyst Brian Ricketts.

Prevost says that the $100/t mark is still sustainable, but continuous increases could be foreseen.
“South Africa faces the issue that we have come to a point in our coal mining history where coal reserves are difficult to obtain,” he adds.

Because the Asian market also faces a severe shortage of coal, China has become a net importer of coal since 2007, which led to global coal supplies being pushed into that market.

“China’s changing coal demand has had a big impact on international coal trade over the last few years,” adds Bricketts.

Prevost also attributes the price increase to a number of other global coal shortage issues, namely the Indonesian market being plagued by heavy rains, and logistical difficulties in Australia’s New Castle port, causing ship vessels to queue at the port, affecting its ability for timely supply to the market. In South Africa, lightning caused severe disruptions at one of the coal substations, which affected the weighing of coal material.

For the industry, the sharp climb over the past few months means that all coal producers will be able to reap greater benefits, as it makes marginal coal extraction operations feasible, as some mines operate at these levels. And, while the cash rolls in, it means that they will have more capital available for expansions.

As a result of the global demand for more coal, South African coal producers are exporting most of their high-quality coal while the lower-quality coal is being sold locally to Eskom, which uses more than 44% of the total produced saleable coal in South Africa, and Sasol, which is the second-biggest coal user.

Prevost continues that the export of high-quality coal creates an incredible demand for South African coal, causing the local market to feel the strain of international demand.

Even though Eskom procures most of its coal from mines located close to the power stations, Prevost says that they are struggling to obtain additional coal.

“Projected global energy trends raise serious concerns of increased vulnerability to supply disruptions and rising carbon dioxide emissions,” says Bricketts.

“If major local coal shortages occur, Eskom might need to import coal from Botswana or Mozam-bique, and the coal industry will once again see radical price hikes,” Prevost warns.

Bricketts raises the concern that global energy needs will increase by more than 50% leading up to 2030.