The Unexpected Coal Crisis

Fri, Jan 14, 2011 - 10:40am
“Mr. PS Bhattacharyya, Chairman of Coal India Limited, said on November 25th 2010 that India’s annual coal demand will exceed output by 100 million tonnes in four years. Coal India is studying the purchase of five mines in the U.S., Australia, and Indonesia, to help plug the deficit. Coal prices are being driven by Asian demand that’s soaking up Pacific region supplies of the fuel and boosting purchases. South Africa shipped 3.32 million tonnes of the fuel to Asia in September as compared with more than 1 million tonnes sent to Europe.” –Bloomberg, 2nd December 2010

Mining coal is a dangerous business to be in because of the flammable nature of the material! Many companies are close to bankrupt with large fines and downtime of production due to the many disasters that seem to follow the business. As disaster strikes a mine, the effect on the rest of the nation is unbelievable at most! What affects India affects Australia, affects the United States, affects Russia, affects China affects Indonesia, and so on and so forth . . . the domino effect at its best.

As countries such as India and Russia close down coal mining productions due to disasters, they begin to import more coal than they produce, causing coal prices to increase at an alarmingly fast rate! While India and Russia depend on coal as their energy source, countries like China need to import from other countries, as well causing a shortage.

As we begin to face a coal shortage at an alarmingly fast rate, Australian firms seem to be the companies to invest in, according to the mainstream. It is true their ability to produce enough coal for at least five years and maintaining control of the coking coal supply puts Australian companies near the top in this industry. These firms will be deciding the prices and quantities. Investors would be smart to do a thorough analysis of any company before investing! Wealth will be made by smart investors in coal and related businesses.

As our members (especially long-term subscribers) know, we look throughout the mining sector to find value for our members. We are NOT a silver-only letter, although many who are not members perceive us in that light. This is not to diminish the fact that most of our time and energy is devoted to the macroeconomic picture and the precious metals; we have suggested copper, manganese, moly, uranium, lithium, and other types of resources for investment.

Steel prices will rise as coking coal prices rise, leading to an increase in the automotive and construction industries. British automobile component manufacturers have already seen a 20% rise, and steel component suppliers with contracts to supply steel in the future will more than likely take a loss on those contracts. China is expected to enter a fight with Japan and South Korea for coking coal. Unfortu­nately for Japan and South Korea, China has a knack for cornering the markets, and last year had already increased its coking coal imports by a factor of 12.

Coking coal will likely rise between 23% and 38%, and thermal coal will likely rise about 14%. In other words, steel prices will rise and energy costs will rise.

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