What’s cooking with coal

By: Kumar Shankar Roy

Coal prices inevitably impact the fortunes of sectors ranging from power to steel. A look at the possible effects.

Reams have been written about rising crude oil prices and its ramifications on our lives. Amidst the hullabaloo, most of us have not noticed that the price of another important fuel has gone up sharply too––coal. Those interested in commodities would know that Big Sandy Barge coal is now trading at $105 dollars per short tonne. It was just $50 dollars in September 2007!
If the doubling of crude oil prices happened in one year, it took coal prices just nine months flat to do the same. Coal’s importance lies in its role in generating power. Being a widely-used fuel in industry, coal prices inevitably impact the fortunes of sectors ranging from cement to steel. What could be the possible effects of rising coal prices?

Why the rise

The reasons behind the price rise range from increasing demand from thermal power plants, the spiralling prices of crude oil and supply-side issues created by poor infrastructure to demand from developing economies.
Rapid economic growth, primarily in China and India, will push global demand for benchmark steam coal up to 800 million tonnes a year in 2009, from 589 million tonnes in 2007, coal information provider, McCloskey Group, has forecast.
Reports also suggest that the availability of coal will remain limited over the long-term. This is because the coal export market has seen a transition driven by China, Indonesia, and Vietnam — which are exporting less coal than in 2007. Key exporter South Africa is expected to follow suit to meet domestic demand.

Effect on earnings

Coal is supposed to remain the backbone of global energy supply for the next quarter of a century, according to experts. Among the sectors that may be directly impacted by constraints on coal availability would be metals, power-generation and cement.
Coal is mainly available in two types, thermal and coking varieties. While thermal coal - the more expensive one - is used by power plants, the coking variety is chiefly used as one of the inputs by steel and cement companies.

Steel companies: They in particular have much to fear from the rise in coal prices. For example, Steel Authority of India Ltd (SAIL) could end up paying more for imported coal now. In the absence of long-term contracts which could have saved costs, some companies will have no other option than to pay up more.
Reports suggest that high-grade coking coal prices have gone up to about $300 a tonne, against $95 a tonne a year-and-a-half ago. Rise in input prices could escalate costs, bringing down margins, if these companies are unable to pass on the hike to consumers.
Earlier this month, the government persuaded steel makers to roll back price hikes in a desperate bid to control inflation. However, companies such as Tata Steel may be able to handle coal shortage better, since they have stakes in coal mines abroad.

Cement companies: Firming coal prices have cemented more worries in the board-rooms of cement makers. The manufacturers are in a fix due to skyrocketing coal prices, which is pushing up the production cost. Cement companies face an additional hurdle: The Government is determined to bring down cement prices. Cement companies use permits to get coal domestically. While Coal India has recently cut the quantum of coal to be allocated to an individual company, coal prices have also been increased three times last year by major suppliers.
Thus, to counter the supply shortage cement companies are trying to opt for the costlier-by-the-minute ‘imported coal’. Since power costs account for a substantial portion of cost of cement, profitability may come under pressure, in the absence of any relief on the price-front.

Power companies: The latest price spikes might also put question marks on the profitability of power generation companies. Ultra-mega thermal stations operating on imported/domestic coal could face pressure as they are not allowed flexibility on tariffs. For companies such as NTPC which plan to import several million tonnes of coal in 2008-09, costs could swell.
The silver lining seems to be an assurance from the Coal Ministry that it will not increase prices this year. The power sector accounts for 75 per cent of the total coal demand.
But if coal demand from power generation companies outstrips domestic supply, they too will be sucked into the vortex of imported coal — prices of which show no signs of calming down soon.