New Opportunities for the Coal Industry Worldwide
By Fei Wang |
Tue, 24 Oct 2006
New Opportunities for the Coal Industry Worldwide
Puda Coal, Massey, and Fording Canadian Coal Discuss Factors Driving Coal Industry Growth
By Fei Wang
January 2006
The world economy is showing signs of accelerating growth, triggering
the increasing demand for coal that has been instrumental in boosting
investment in the coal industry. The coal industry worldwide is
presented with new development opportunities.
Coal markets are divided into thermal (steaming) and metallurgical
coals (coking coal is a specific type of metallurgical coal) based on
different characteristics and usages of the coals. Thermal coal is the
"coal" that most people are familiar with. It only has heating value
and is used to drive turbines to generate electricity. On the other
hand, metallurgical coals can be used as a source of carbon to convert
a metal ore to metal itself. During the process, metallurgical coals
also generate heat that powers the plant, making this type of coal a
key raw material for the steel industry. Therefore, when looking at
what drives the demand for the coal market, both the energy market with
the high price of oil and the steel market with increased construction
levels should be evaluated.
Increasing Demand Drives Worldwide Growth
A consistent point among participating companies is that China's
economic development is the major factor that drives the growth in both
the metallurgical and thermal coal market. According to Mark Lidiard,
Vice President Investor Relations and Communications in BHP Billiton,
the biggest coking coal producer around the world, "Metallurgical coal
is used in steel making industries, and incremental demand for
metallurgical coal is primarily being driven by the growth in the
Chinese steel market. On the other hand, steaming or thermal coal is
used in power industry, and they tend to be driven more by global power
demand. Although again incremental growth in power in China is causing
some pressure on the thermal coal industry, which again is creating
good demand for thermal coal products around the world. As well very
high current oil and gas prices are driving the demand for coal."
Katharine W. Kenny, Vice President, Investor Relations at Massey
Energy, explains, "The demand side is obviously driven by strong
economic growth around the world, from the US and also from China.
China is having a major impact on demand around the world. But right
behind China is India and the US. So there has been some significant
economic recovery throughout the world that is driving demand for both
steam and metallurgical coal."
Susan Soprovich, director of Investor Relations in Fording Canadian
Coal Trust holds a similar opinion,"Our major product is metallurgical
coal, and the major driving factor to our product is definitely the
steel industry." With the increasing demand Fording's net income was
$427 million in the third quarter, up from $41 million in 2004, largely
due to higher metallurgical coal sales prices, according to a Company
news release with Jim Popowich, President of Fording Canadian Coal
Trust stating," We benefited from a full quarter of the new higher coal
year prices, which doubled our distribution to unit holders over that
of the second quarter."
Inside China's Market
China's economic growth creates considerable opportunities for foreign
coal companies, but it has a much bigger impact on domestic coal
companies. According to the China Coal Industry Association, with
demand growing, the price of thermal coal used for power generation had
risen 50 percent to more than $60 a tonne since the start of this year.
Term prices for coking coal, the form used in steel production, were
set to almost double next year, to $100 a tonne or above from below $60
this year. According to Puda Coal Chairman and Chief Executive Officer
Zhao Ming, opportunities in China's coking coal market are the result
of "mass construction of infrastructures, including but not limited to
real estate development, extended urbanization process, west region
development, and 2008 Olympic Games, in China. These constructions
require the use of large amount of steel, and coking coal is essential
in making coke, which is largely used in the steel making process.
Puda's future focus is to sell directly to steel mills with their own
coking facilities, or so-called integrated coking-steel making mills."
According to Zhao, roughly 2.2 metric tons of clean coking coal is
needed to produce 1 metric ton of steel.
Puda is one of the largest suppliers of top grade coking coal in Shanxi
province (Shanxi supplies nearly 50% of China's coking coal).
Distinctively, Puda Coal Inc. produces "Clean Coking Coal", which
generates much less air pollution than normal coking coal while
producing coke. With the new government environmental protection
policy, Puda is realizing a competitive advantage according to Zhao who
states, "Clean coking coal not only guarantees the quality of the steel
product, but also reduces the industrial waste from steel production.
It is very environmental friendly. The Chinese government just came out
with a new policy system whereby all firms that do not meet the
environmental requirements will either be closed, have operations
stopped or ownership changed. As for the steel industry, in order to
meet the environmental requirement, they need to start working on the
beginning phase of the whole production process. Therefore, clean
coking coal, produced by Puda, is becoming a very popular raw material
among all steel manufacturers, resulting in the overwhelming market
demand for Puda's high quality clean coking coal."
Limited Supply Drives up the Price
Coal supply cannot keep up with the increasing demand according to
Kenny, who states, "The other driving factor is from the supply side,
which we think is almost as important (as demand) right now. The
interesting thing is, probably for the first time in history, supply of
coal around the world, including in the US, has been unable to keep up
with the demand. So while demand has been increasing significantly, the
price of coal also increased due to supply constraints."
The reason for the lagging supply is not the limited natural resources,
but the problems with infrastructure. "You are not seeing as much of a
supply response as quickly as in the past and that is partially because
of the infrastructure issue, and partially because of rail issues, and
it's true in the US, as well as in Australia and elsewhere. China and
the United States have tons of reserves. But the problem is that we
cannot get experienced labor, and we don't have the infrastructure.
There is plenty of coal in the Western US, but they don't have enough
rail to get it to the East. We are seeing some growth in supply in
Central Appalachian, but it is not nearly the amount you would expect
to see, and we still expect that in Central Appalachian coal production
overall, even with Massey's expected growth, will decline between now
and 2010. Massey is the leader in the area, which provides some of the
highest quality coal in the world, so we think we have great
opportunities," describes Kenny.
Fei Wang
Fei Wang holds an Honors Bachelor of Commerce from University of
British Columbia Sauder Business School, with double major in Finance
and Marketing. She has experience in investment banking and advertising
in Canada, China and Korea, with a firm academic background.
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