Coal Surge Seen by Mobius as China’s Imports

Coal Surge Seen by Mobius as China’s Imports

Coal is poised to rebound from a two-year slump as China buys more than it exports for the first time in history.

Power use in China, the world’s biggest coal producer, is rising 13 percent annually, and utilities are building plants at a record pace. The nation gets 78 percent of its electricity from coal, spurring imports from Australia, Indonesia and Vietnam.

“The coal sector in China has undergone a change,” said Mark Mobius, who oversees $30 billion at Templeton Asset Management Ltd. in Singapore. Mobius says Asian coal prices may surge 42 percent in five years, boosting China Shenhua Energy Co., the biggest coal company, China Coal Energy Co. and Yanzhou Coal Mining Co.

Rising prices for the biggest fossil fuel after oil would drive power costs higher from Tokyo to London and benefit mining companies Xstrata Plc, Rio Tinto Group and BHP Billiton Ltd. Consumers such as Tokyo Electric Power Co. and RWE AG of Germany will pay more, hurting profit.

Annual coal contract prices in Asia may surpass all-time highs in the next 12 months. Deutsche Bank AG analysts led by Peter Richardson in Melbourne predict $58 a metric ton next year and $59.50 in 2009, from about $55.50 for the year that started April 1. New York-based Goldman Sachs Group Inc. expects $56 next year.

Newcastle Shipments

Coal last traded at $54.50 a ton for shipments from Newcastle, Australia, down 16 percent from a peak of $63.10 in June 2004, according to the McCloskey Group Ltd., a coal consulting company in Hampshire, England.

Goldman Sachs, the world’s biggest securities firm by market value, forecasts that higher coal prices will cause a 22 percent gain in the shares of Xstrata, based in Zug, Switzerland, the world’s largest exporter of coal used in power plants. The stock may rise to 33.65 pounds ($66.87) from 27.66 pounds as of last week, Goldman Sachs analysts say.

Costs for shipping bulk commodities already are rising because of coal. At Newcastle, Australia, the world’s biggest coal-loading port, a record 71 vessels sit offshore waiting to load because producers can’t fill the orders fast enough.

The Baltic Dry Index, the benchmark for commodity-shipping costs, has risen 26 percent this year to 5553, following an 80 percent surge in 2006 on London’s Baltic Exchange.

China’s Power

China, which mines more than twice as much coal as the U.S., the next biggest producer, uses the fuel to generate 622 gigawatts of electricity. Plants built in China in the last year alone generate enough power to supply the U.K.

Si Posen, an expert at the China Coal Information Institute, said the Chinese never had to look outside the country for the fuel since 10,000 years ago at the time of the New Stone Age, or Neolithic Era.

“People in Shanxi, now the largest coal production base, have been burning coal as fuel since then,” Posen said in a telephone interview from Beijing. “China had been self- sufficient since it started producing coal.”

The government’s closure of unsafe and illegal mines that killed 5,986 workers in 2005, or more than 16 people every day, is adding to the pressure on coal prices. Regulators shut 8,300 in the two years through 2006 and plan another 1,700 shutdowns by year-end, Li Yizhong, vice minister of state administration of work safety, said at the China Coaltrans Conference in Beijing today.

Imports Increase

China’s purchases of coal in January exceeded exports by 1.4 million tons, the first time that happened, data from the Beijing-based General Administration of Customs show. While the trend reversed in February, the impetus for imports to rise is unstoppable. By 2010, demand may reach 2.6 billion tons, 270 million tons more than last year’s output, the government said.

“We have been forecasting that China’s exports will fall, and it has come to that, even more rapidly than we expected,” said Clyde Henderson, a coal analyst at Energy Economics Pty in Sydney.

Any turnaround to net purchases this year would come three years sooner than predicted by the Australian Bureau of Agricultural and Resource Economics, the government forecaster in the world’s second-biggest exporter of thermal coal. Datang International Power Generation Co., the second-largest Chinese power producer with a Hong Kong stock-exchange listing, is among the buyers.

“Coal imports will account for about 10 percent of our total demand,” said Bai Fugui, fuel procurement manager at Beijing-based Datang. Datang’s generators burn about 60 million tons a year, more than is used in the U.K., Europe’s second- largest economy. He said he’s buying coal from Indonesia and Vietnam this year.

Asian Prices

The increase in China’s imports will help lift prices in Europe by forcing consumers to buy more from South Africa and Russia. Coal prices in Europe have risen to about $70 a ton from around $52 at the end of 2005, according to McCloskey Group.

U.S. buyers will be insulated from higher prices by the nation’s own supplies, said Richard Price, president of Westminster Securities Corp., a St. Louis-based investment bank.

“China’s net exports have been declining and can be expected to further decline, offset by Indonesian, Australian and Vietnamese imports, but not any significant volume of U.S. exports,” he said. U.S. eastern coal prices have fallen to around $41 a ton from $57 at the end of 2005, according to data compiled by Bloomberg.

Last month, China Shenhua of Beijing said it will start buying Indonesian coal because it’s cheaper than shipments sent along China’s coast. Prices may rise “gradually” in the next few years before gaining “drastically,” Shenhua Chairman Chen Biting told reporters in Hong Kong March 26.

Mobius’s Call

Shenhua will produce 400 million tons of the fuel by 2010, almost double last year’s total, President Ling Wen said in Beijing today.

Shenhua shares on the Hong Kong stock exchange have risen 50 percent in the past year to HK$19.78, more than the 26 percent gain in the benchmark Hang Seng index.

By 2012, according to Templeton’s Mobius, prices may reach $78, surpassing the record $63.10-a-ton spot price on June 25, 2004, when shortages prompted China to restrict exports.

“The prospect of China being a net importer of thermal coal as early as 2008 has placed material upward pressure on the outlook,” Deutsche Bank, Europe’s biggest investment bank by revenue, said in its report. The outlook “has improved significantly.”

Indonesia, the world’s biggest exporter of coal, is increasing output to respond to demand and higher prices. In February, Indonesia accounted for 41 percent of Chinese imports.

Insufficient Supply

“China and India are both very active in looking for coal here, and people are getting greedy,” Jeffrey Mulyono, head of the Jakarta-based coal mining association in Indonesia, said in an interview April 4. “They want to take any type of coal.”

Mulyono said Indonesia will boost exports 11.4 percent to 165 million tons this year, from 148 million in 2006.

Asian power generators will increase coal orders by more than 300 million tons in the next three to four years because of economic growth, said Nalinkant Rathod, commissioner at Jakarta- based PT Bumi Resources, Asia’s third-largest coal miner. China will raise consumption by at least 200 million tons, he said. China’s gross domestic product grew 10.4 percent in 2006, the fastest among major economies.

“That creates a gap in the supply position as demand is very large but supply is not very encouraging,” Rathod said on April 4. Prices will “spike when people can’t fill the gaps.”

Bumi, Indonesia’s biggest coal exporter to power plants, forecasts shipments to China will double to 2 million tons this year, Dileep Srivastava, head of investor relations, said in an e-mail on April 9.

“There have been so many calls from China, seeking contracts to get coal from us,” Bob Kamandanu, president director of PT Berau Coal of Jakarta, Indonesia’s fifth-largest producer, said in a phone interview April 9. “We have contracts to supply about 1.5 million tons of coal a year to China and expect this to double within three years.”


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