Coal as a Dwindling Resource

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Commodities, Supply & Demand

When I was a science undergrad, I would read time and again how coal reserves were sufficient for 200-300 years of demand. So why do we have what appears to be a world shortage and prices rising exponentially year over year?

It’s not what’s in the ground; it’s how readily you can get it out and move it. So if demand temporarily outstrips supply, it’s just a matter of extending existing mines or investing in new ones and building some more coal carrying vessels, right? Maybe not, according to a report in purchasing.com which made the rather alarming prediction that prices would continue to rise, possibly double, due to dwindling supplies.  Another report from the Energy Watch Group states that actually we only have about 20 years at current growth rates before coal production declines. The report suggests that data on which reserves are based is severely out of date and consumption is growing much faster than previously allowed for. China and India, both with supposedly huge reserves and traditionally large exports have been major buyers over the last year. Demand is being exacerbated by oil fired power stations being turned to coal even in environmentally sensitive Europe, in response to limited supply options and rising oil prices.

So what significance does this have for the metals business? Two major areas of cost immediately spring to mind. Coking coal is used to make some 66% of the world’s liquid steel in blast furnaces, estimated at an annual consumption of some 700m tons of coal. The balance of liquid steel comes from Electric Arc Furnaces the power for which comes more often than not from coal fired power stations. India and China respectively produce 70% and 78% of their energy from coal fired power stations according to MoneyMorning.com. Therefore production costs for the ferrous and non ferrous metals industries are directly impacted by the cost and availability of thermal coal used in power generation.

So if coal costs do double by the end of this year it will severely limit the ability of steel and non ferrous metal producers to respond to softening demand. Expect a lull in coal demand through the summer as China closes power stations, aluminum smelters and blast furnaces upwind of Beijing, but we can be sure come September they will be back on line with a vengeance.

–Stuart Burns

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