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Federal Regulators Deal Huge Blow To The Coal Industry

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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Coal Stocks Could be in for a Big Move

Despite all of today's carbon concerns, the world still largely runs on coal. In fact, according to BP's recently-released annual energy review, coal's share of global energy use increased in 2009. In fact, the percentage of global energy demand met by coal was the highest since 1970!

Coal is critical to energy supply in many countries. And that is leading those countries to mess with the market.

India is perhaps the best example. The government sets prices for domestically-produced coal. The only problem is, they set those prices so low that most of India's miners are having trouble turning profits.

The result being that Indian coal mining expansion has been slow. Leading to acute shortages. Today, 31 of the 81 power plants monitored by India's Central Electricity Authority are at "critical" coal supply levels, holding less than seven days' worth of stockpiles.

In fact, 16 of those plants are running on less than four days' supply. That's 20% of the nation's power teetering on the edge of shutdown if there's a supply disruption.

Coal price-fixing has been a disaster for supply. And yet the government seems very reluctant to raise domestic prices. In fact, this March the government went the other way, levying a "clean energy" tax on domestic coal producers. This is only going to raise production costs, squeezing coal companies' margins even more.

The chosen solution is imports. Companies bringing foreign coal into India will be allowed to charge higher prices.

This means importing is going to be a good business for someone. And coal projects that have the potential to ship to India are going to be sought after.

Now it appears that China may be going a similar route. This week, the Chinese government announced prices freezes on all coal sales in the country.

Chinese coal sellers had been moving toward flexible monthly prices. And such prices had been escalating of late.

But now the government will force sellers to stick to previously agreed-upon yearly pricing. The move is apparently aimed at containing Chinese inflation.

This is a big negative for Chinese coal producers, many of whom have relatively high production costs. It will likely put a crimp on local supply. Potentially leading to a situation similar to India, where imports become a stop-gap.

Got a coal project in Indonesia, Vietnam or Madagascar? The value might be climbing as we speak.

By. Dave Forest of Notela Resources




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