More floods push coal price to one year high

Fresh flooding in top global exporter Australia has added a further USD 10 to coal prices, driving thermal coal to a year high.

Prices for thermal coal, used for power generation and the second-biggest energy source after oil, have gained over 40% in the past 12 months to over USD 140 a tonne because supply from every key exporter is capped.

Australia's lost exports are mostly less-traded coking coal, used to make steel, but with both grades costlier by the day Asia's heavy industry and utilities are facing bigger bills.

Weather related problems in Colombia, South Africa, Russia, Indonesia, and now Australia, have caused a supply tightness which shows little sign of abating in the near-term.

"All the price risk is to the upside," said Jim Lennon, senior commodities analyst with Macquarie Bank in London.

"Queensland is mostly a coking coal issue but there are still problems in many countries with thermal coal outside Australia, such as Colombia," Lennon said.

Analysts have been swiftly updating their price predictions to keep up with the runaway market.

"It's very difficult to see (Australia coal port) Newcastle prices back below USD 100 any time soon but whether it gets to USD 200 -- which we don't expect at the moment -- remains to be seen, it's impossible to tell," Lennon said.

On Monday, benchmark prices for Australian thermal coal, traded above USD 143.00 a tonne FOB Newcastle and delivered Europe cargoes were offered at USD 141.00 as utility buyers rushed to find replacement coal for tonnage lost from Queensland.

China has been extensively re-selling unwanted coal but this has been rapidly absorbed by utilities in South Korea, struggling to replace lost Queensland cargoes, Lennon said.

Some major traders and utilities doubted the price rise could last into the second quarter because, while there has been coal lost, key consuming countries have bought little or nothing in the past few months.

Players ought to be taking some profits at prices in excess of USD 130, they said.

"We've seen little demand from Chinese and Indian buyers but I do remain overall bullish for coal prices," said Paul Graham-Clarke, Managing Director of London Commodity Brokers.

"We will see stronger markets but it won't be a straight line up," he added.

Credit Suisse also cautioned that an end to weather-related disruptions could put downward pressure on prices in a research note on Monday.

Best performer?

Bank Of America Merrill Lynch, among others, believes thermal coal is likely to be the best-performing commodity in 2011, even without the Australia problems.

Credit Suisse forecast prices will remain strong in the medium-term, at around USD 120 in 2011.

Nomura replaced iron ore with thermal coal as its preferred commodity exposure for 2011, due to rising imports from India and China.

"Our bullish view on thermal coal has little to do with recent cold weather or flooding in Queensland or South Africa," Nomura said in a research note on Monday.

"There doesn't seem to be anything stopping it going up at the moment and how long it lasts, nobody knows, but we do know the Chinese are selling and there's almost no buying in Europe," one major European utility said.