Research Roundup: Are High Coal Prices Here to Stay?
Today’s Wall Street Journal story examining China’s role in pushing up global coal prices raises the question of whether this is a short-term blip or a long-term trend.
China has long been a huge supplier of coal to itself and the rest of the world. But in the first half of last year, it imported more than it exported for the first time, setting off a near-doubling of most coal prices around the world, the WSJ reports. “The capper came in late January when a winter of punishing snowstorms and power shortages led Beijing to suspend coal exports for at least two months.”
Some experts say coal prices could remain high or even keep climbing through 2009 or beyond, weighing on the already-slowing world economy.
Even though coal is a leading source of atmosphere-warming greenhouse gases, its share of the world’s energy diet is increasing — which could help keep its price up in a recession, the WSJ says. “Although the use of cleaner-burning alternative fuels is on the rise, fast-growing energy consumption is expected to underpin coal demand. Still a relatively cheap — and abundant — alternative to oil, coal is sought in rapidly industrializing nations such as Brazil, India and Vietnam as well as China.”
Standard & Poors recently identified coal as one of the top ten issues facing electric utilities in the US – but not from the point of view of market prices. “It’s likely that the new administration in Washington will try to make its mark on greenhouse gas sometime in 2009; until then federal action seems remote, although campaign rhetoric will be heated. Framing the 2009 dialogue will be energy independence, national security, and carbon-based fuels, such as coal and oil. Future legislation that crimps coal use and affects credit quality for electric utilities is possible, but not certain at the moment, given past stalemates on energy policy issues.”
Funding for reducing greenhouse gas emission will affect credit quality for coal plant operators.
IBISWorld also says environmental concerns will have an impact on the US coal industry. “Attempts by electricity generators to control their greenhouse gas emissions in response to rising public concern would almost certainly take the form of switching to lower carbon sources of fuel, adversely affecting the demand for coal. Continued investment in cleaner coal technology, by both the private sector and the government, offer only limited scope for reducing greenhouse emissions, “IBISWorld says in Coal Mining in the US.
“After increasing markedly in the mid 2000s, coal prices are expected to stabilize and then drift lower over the outlook period to 2011, partly in response to higher production levels. Sought-after low sulfur coals will continue to attract a premium price. Overall, industry performance is expected to decline over the outlook period as generally weaker prices offset increases in output. ”
Real industry revenue is expected to fall at an average annual rate of 4.5% over the five years ending in 2012.
In its Coal Outlook for 2008, Fitch Ratings notes coal producers are benefiting from improved domestic consumption after a weak period, greater exports and declining production in high cost basins. “Regulatory uncertainty about carbon emissions, however, has stalled plans for many new coal plant builds, which will cap domestic demand in the medium term. Margin expansion will be difficult given that cost inflation is not expected to be offset by productivity gains.” However:
Growth in export demand may underpin higher pricing and should help producers manage production volumes efficiently to lower unit costs.
CreditSights admits its thesis of increasing supplies coming to market and lowering prices “has proved dead wrong in the near-term owing to numerous global supply constraints.” But
While our thesis certainly didn’t incorporate these short-term factors, we still maintain that over the long-term coal is not a supply constrained commodity and producers will not be able to maintain sustainable pricing power at these levels.
CreditSights says “we remain underweight coal producer bonds as a whole.”
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