Thermal Coal Market Reacts to Japanese Disasters

By Tony D'Altorio

The global effects of Japan’s three-pronged disaster – earthquake, tsunami and the resulting nuclear crisis – are still unfolding. But it’s already becoming evident how the $100 billion-a-year seaborne thermal coal market will react.

Over the short term, the commodity has a bearish outlook. As economic activity slows in Japan, so does demand for power, and therefore thermal coal. In addition, several power plants were damaged. So utilities have asked coal mining companies to defer their cargoes to a later date. This action has put a temporary lid on prices for seaborne thermal coal in Asia. Prices in the Australian port of Newcastle, a benchmark for the Pacific basin, have remained stable at around $128 a ton, below the two-year high of $135 a ton set in January.

Yet, in the end, the commodity’s outlook in the Pacific has never looked better.

Thermal Coal Prices Continue to Heat Up

Thermal coal is already tight in Asia, especially after flooding in Australia hit production. And, as I detailed back in February, rising demand from China and India helped fire up thermal coal prices even more. But those countries still trail Japan, the world’s largest thermal coal importer. And at some point, Japanese demand will recover as factories reopen and the country rebuilds itself.

With nuclear power output severely constrained, coal-fired plants will have to work even harder to produce more power. June through September, the country’s traditional peak months for electricity consumption, will prove especially rough. Japan already buys 10 million tons of thermal coal per month. But the industry expects it to need an extra 500,000 tons per month in July through December to meet additional demand.

That number could hike still. After all, some Japanese utilities need to rebuild their stockpiles, which were washed away by the tsunami. All that extra demand will just tighten the market further, pushing up prices. The upcoming negotiations for the 2011-12 annual thermal coal contracts in Asia will show the same conclusion.

Already postponed a few times, the talks should resume in a few weeks. When they do, the settlement price will almost certainly exceed the 2008-09 record of $125 a ton. Some coal mining companies already proposed $145 a ton, whereas Japanese utilities countered with $130. The final price should probably be in the $135-$140 range.

And it’s not just in Asia that thermal coal prices are climbing:

• The same goes for the Atlantic basin.
• In Rotterdam, the European benchmark, they have already risen nearly 11% since the earthquake. They now sit at $135 a ton, a 2.5 year high.
• Meanwhile, Germany decided to idle a large chunk of its nuclear power stations due to the situation in Japan. That’s just one more reason for prices to keep climbing.

Thermal Coal Investment Ideas

Globally, all of these factors are turning thermal coal into the "anti-nuke" source of power. This will be very positive for thermal coal producers and their investors going forward.

• One such company is Xstrata PLC ADR (XSRAY.PK), the world’s biggest thermal coal exporter.
• Peabody Energy (BTU), Anglo American PLC ADR (AAUKY.PK) and Indonesia-based PT Bumi Resources also look good to check into.

Bottom line: Developing countries were already stoking demand for thermal coal. And current events, like the rapid move away from nuclear power, have made for an even more bullish scene. Investors would do well to get aboard the coal train for a long, multi-year ride.

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