Hogsback on the perfect storm brewing in coal prices

COAL is heading into “a perfect storm”, but not the type of political storm which has dogged the industry in recent years. This time around analysts are telling Hogsback that the storm will be about price, with coal set to enjoy a sharp increase.
Hogsback on the perfect storm brewing in coal prices Hogsback on the perfect storm brewing in coal prices Hogsback on the perfect storm brewing in coal prices Hogsback on the perfect storm brewing in coal prices Hogsback on the perfect storm brewing in coal prices


Tim Treadgold

The short-term price for thermal coal is said to be heading back above $US130 a tonne, and the latest metallurgical sales have been back up around $US315/t.

This time around it is not just floods and cyclones driving coal prices higher. It is a combination of remarkable factors, some of which could be long lasting.

Heavy rain in the Hunter Valley of New South Wales is undoubtedly an issue for Australian east coast exports, but other problems weighing on the coal market include the truly bizarre combination of labour and capital staging strike action at different Queensland projects.

It was the combination of workers planning rolling strikes at six BMA mines (BHP and Mitsubishi) and Aquila putting coal shipments on hold while it argues with its partner, Vale, in a dispute over the Isaac Plains mine, which first caught The Hog’ eye.

What a strange world we live in was his reaction. Workers downing tools in an old-fashioned dispute over wages and conditions is nothing new, but it is a rare event to have mine owners doing exactly the same thing, closing an operation over the value of a contract – a strike by capitalists which would greatly amuse the comrades of the last century.

But, the sight of workers and mine owners walking off the job singing The Internationale in harmony is just one of the issues adding to pressure in the coal market. Consider a few more:

  • South African coal exports are being hampered by infrastructure bottlenecks, with miners being advised to keep their coal at home to meet domestic demand.
  • Tepco, the accident-prone Japanese electricity generator trying to cool its failed Fukushima nuclear power plant has returned to the coal market to stock up ahead of re-opening mothballed coal-fired power stations.
  • Itochu, a Japanese trading house, slapping $US1.5 billion on the table to acquire a 20% stake in the Drummond Company mines in Colombia, a move also linked to rising coal-fired power production in Japan.
  • China has been booking big coal purchases as it seeks to boost flagging domestic electricity supplies.
  • New Zealand coal exports from its South Island port of Lyttelton have been disrupted because of concern over possible earthquake damage to a coal export wharf.
  • Germany is planning a big boost to coal-fired electricity production as it pushes ahead with plans to permanently shut all of its nuclear power plants.
  • Environmental activists step up their protests over expansion of the coal mining industry in Australia, and just about everywhere else.
  • Slowing investment plans in Australia as project owners fret about the long-term impact of the proposed super-tax on coal and iron ore, and the separate effect of the proposed carbon tax which could force the closure of some mines.

It’s this cocktail of events, some connected and some not, which is bearing down on the coal industry to deliver the good news of higher prices for mines in production, and bad news for mines trying to start production.

What becomes more interesting than simply listing the factors at work is to look behind them, and separate natural events from the unnatural, or man-made factors.

Floods, cyclones and earthquakes represent the sort of market distorting event that every miner has to manage. No one can predict them, you just find a way to repair the damage and get on with the job.

The man-made issues are in a different category because they are more predictable, and ought to be better managed because we can see them coming, but for some reason they seem less avoidable than the occasional cyclone.

Infrastructure bottlenecks, for example, have been around for the past 100 years, have never been properly addressed by government and look like remaining unaddressed in perpetuity thanks to the rise of environmentalism and its anti-coal agenda.

If The Hog was a betting man he would be loading up on coal stocks ahead of the inevitable crisis heading down the track as the irresistible force of global demand for electricity meets the immovable force of anti-coal campaigns.

That’s why the outlook for coal prices is forming the perfect storm which has investment analysts drooling at the prospect of huge profits from rising coal prices, and The Hog sharpening his pencil as coal becomes one of the world’s more exciting industries.