Coal Hopping on Power, Steel Demand in Asia

Coal prices, which hit record highs last month, will probably keep climbing amid surging demand and dwindling supply in China, experts say.

Prices for both thermal coal, which is used to generate electricity, and coking coal, which is used to make steel, have more than doubled in the past year. Thermal coal prices at Australia’s Newcastle port, a benchmark for Asia, stood at $132.05 per metric ton last week.

"It's like the California gold rush," Michael O'Keeffe, chief executive of Riversdale Mining, an Australian company exploring for coal in the southern African country of Mozambique, tells Forbes. "There is a global shortage of both thermal and coking coal.”

And it’s not just China, he says. "Indian demand for steel, and hence coking coal, is going through the roof. We've always believed that you'll be able to find iron ore for steel, but it's much harder to get coking coal."

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For years China not only mined coal for itself but exported the product throughout the world. Then in the first six months of 2007, the Asian giant imported more coal than it exported for the first time. That’s what sent coal prices jumping.

The final catalyst for the surge came in January, when vicious snowstorms and power shortages pushed the Chinese government to halt coal exports for at least two months.

Asian prices have exploded more than 40 percent since then.

"The velocity of the change has been remarkable,” Thomas Hoffman, head of external affairs for coal supplier Consol Energy of the U.S., tells The Wall Street Journal.

In addition to the supply interruption in China, flooding earlier this year at major Australian mines crimped that nation’s exports to Asia. Power shortages in South Africa have stunted its exports to Europe. And rail-car shortages in Russia have limited its exports.

Meanwhile, demand is surging for coal around the world, as it remains cheaper than oil. The world as a whole uses coal to produce about 40 percent of its electricity, The Journal notes.

Thus, many experts anticipate coal prices will keep climbing through at least next year.

"Spot coal prices will continue to rise,” Mark Pervan, a resource analyst at ANZ Banking Group, tells Reuters. "It doesn’t look like there are many bearish factors in sight.”

You can profit from gains in the commodity by purchasing shares of coal miners or through an exchange-traded fund that trades in sync with an index of coal-mining stocks.

Some potential vehicles include the Van Eck Market Vectors Coal Exchange Traded Fund (KOL), which tracks the return of the Stowe Coal Index.

Its top holdings are PTI Bumi Resources of Indonesia, Consol Energy of the U.S. and China Shenhua Energy.

Another possibility is directly investing producers like Consol Energy or Arch Coal.

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