Is Thermal Coal The New Oil

Given the apparent energy variance between Coal and Crude, and providing for that inefficiency, the spot price of Coal has the potential to rise upto $ 160 per tonne against 2008 supply contracts of $ 125 per tonne. A near 30 per cent upside hereon.
 
While investors live under the impression that Coal prices will drop over 2009-2012, the chances are that supplies from new mines in Australia and Indonesia will be dedicated to Indian Thermal Power Plants where close to $ 100 bn will be spent over the next 5 years.
 
Indian investors might do well to pick out the listed Coal miners in the country and build long term positions in those stocks, in anticipation of a Super-Spike in Crude prices. This is of significance because while Oil reserves globally will not stretch beyond 25 years, Coal would and most thermal plants globally would then be striving for Coal which too would be diminishing being a finite asset for Earth.
 
 
We continue to view the thermal coal market has having some of the
strongest fundamentals in the commodities space. Demand in the developing countries remains very strong and inelastic.
 
Supply on the other hand has been hobbled by infrastructure constraints, weather problems and strong domestic demand from exporter nations resulting in a significant deceleration and in some cases contraction in export levels.
 
2008 contracts were recently settled at US$125/t; we believe that there is upside risk to our 2009E contract forecast of US$125/t.
 
Spot prices for thermal coal in both the Australian and South African markets have been exceptionally volatile over the past quarter, leading many utility analysts around the global to rush back to their models.
 
Following the Chinese power crisis in February which pushed Newcastle coal prices over US$140/t, the central government moved to prioritise shipments of thermal coal from minesite to the coastal utilities. The rebuild of inventories was very rapid (more so than
what we were expecting) and this resulted in some slack entering into the market.
 
Consequently NWC prices fell back to the US$120/t level.
 
2008 contract settled at US$125/t
 
Xstrata settled 2008 contracts at US$125/t; this was pretty much in-line with our forecast of US$130/t. We also believe Rio Tinto may have settled at this level.
 
We currently forecast contract pricing for 2009 at US$125/t; however we believe that there may be upside risk to this forecast given continued supply-side problems globally, but specifically we believe that the Chinese power issues which emerged early this year was in fact a consequence of a chronic infrastructure bottleneck rather than solely a function of adverse winter weather.
 
Availability to remain poor over the long-term
In 2007 the key issue for the thermal coal market was the transition of China, from its position as a once significant exporter of thermal coal into the seaborne market to one where the country was a net import.
 
This inflection point, combined with a significant deceleration of Indonesian export growth, from an estimated 36% in 2006 to roughly 10% in 2007 in addition to a deceleration in Vietnamese export growth from 76% in 2006 to 10% in 2007 resulted in the emergence of substantial tightness in the seaborne thermal coal market.
 
Coal stocks in China falling again＃
According to InterFax coal stockpiles in China have ＆plummeted＊ from March＊s level; and some power plants are facing limited supplies. The SERC indicated at a recent press conference that total coal stockpiled in key power plants dropped to about 47mt at 20 April from 53mt at the beginning of March.
 
Small mine closure: Some coal industry analysts within China suggest that the problem is the fact that the government has forced many small-scale coal mines to close over the past year (for safety and efficiency issues)
 
Lack of cashflow: According to the head of the Shanxi Electric Power
Assoc; 70% of thermal power plants across China have suffered operational losses in Q1 08; with prices up 160% y/y. He has indicated that some power plants are not securing sufficient cash flow to source enough coal for power generation.
 
Infrastructure: We believe that the above conditions, in addition to
insufficient transport capacity, rail/road and shipping, are responsible for the squeeze in Chinese thermal coal markets.
 
There are risks of further power shortages this summer in China as the country enters into is peak power consuming period.
 
We expect that if conditions in fact worsen the Chinese government will, once again, be forced to intervene, possible steps include;
 
1) Mandate sufficient coal supplies to utilities by prioritising shipments
from mine-site to the southern, coastal utilities.
2) Restricting further export quotas
3) Re-opening smaller mines; although this doesn＊t solve the problem of getting the coal to the consumer.
 
News-flow to watch for
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Conclusion of Japanese contract negotiations
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China 每 end-of-month trade statistics (imports, domestic production)