Coal prices: Fettered demand to arrest gains

The production of coal by Australia is expected to be disrupted by heavy rains as Australias bureau of meteorology has issued warnings for cyclones and said that the chances of above-average rainfall in Queensland in the last quarter of 2011 are between 65 to 70 percent. Leading analysts believe that in case of any disruption of supply, the prices of coal would jump by 20 percent to $350 per ton. This outlook is lent credence by the price changes witnessed last year, when heavy rains in Australia (producer of 40 percent of worlds coking coal) disrupted the coal mining process and prices went up by a staggering 16 percent. However, while analysing the outlook, one should keep in mind that last year the price increase was backed by heavy demand from emerging economies; China and India that are growing at phenomenal pace. The outlook for the emerging economies in 2012 is not as stellar as growth rates of both China and India have been revised significantly downwards. The advanced economies too are having a tough time trying to tackle the financial crisis. In fact the demand for coal is more dependent on the well-being of advanced economies since they are the driving force behind the export-based emerging countries, in addition to generating a significant portion of the total demand. On the other hand, the continuing upwards movement of currencies of major coal producing countries like Australia and supply disruption due to rain are pushing prices upwards. The local demand for coal is expected to increase in the coming winter months. Sources told BR Research that any increase in global coal prices would directly increase the local cement and steel prices; and in the long-run local demand would increase as the gas boiler plants set up by many industries would have to shift form gas to coal, owing to the shortages of gas supply. Coming months are of real importance as the affects of the factors influencing both the supply (rains) and demand (global economic growth) of coal would become clear.