Coal shortage creates a profit opportunity

Posted January 25, 2008

"The longer the coal shortage in China and mine closings in South Africa continue, the more bruised you’ll get kicking yourself for not getting into a good coal company in the U.S. or Australia before it's too late." — Stephanie Grimmett

by Stephanie Grimmett

Baltimore – (TFN): Peak oil, huh? How about peak coal?

It’s dirty, smelly and greasy. It powers much of the developing world. And a series of ill-timed snafus around the globe have created a surprise coal shortage.

Coal Shortage: South Africa

European coal prices shot up this week when diversified miner Anglo American (AAUK: NASDAQ) announced it was closing five of its nine South African coal mines until state power company Eskom Holdings got its act together.

Other miners in the country are performing similar closings after Eskom told them it couldn’t guarantee electricity to the mines. I guess building a coal-powered electrical plant of their own wasn’t cost effective.

The mines could be closed for the next two to six weeks, according to Eskom. And that won’t be the end of the power shortages. Cuts and rationing could go on for awhile, despite pressure from mining companies across the country.

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It seems Eskom can’t find enough skilled labor in South Africa to keep up with its growth demands. The number of employees at the state-owned power company has fallen to nearly half of its total a decade ago. And the ratio of employees to customers (1:130) is one third what it was in 1996 (1:45).

The shortages and interruptions in power will continue until Eskom either completes the technology upgrades to do without as many employees or the amount of skilled labor in the country rises. Either way, the situation will probably take up to two years to resolve itself.

South Africa, to be more specific, Richards Bay, South Africa, supplies more than a quarter of Europe’s coal. And the closures have forced Europe to tighten its belt. Next year’s settlement delivery contracts to Amsterdam, Rotterdam and Antwerp rose $6, 5.7%, to $112.25 per metric ton on the news. That move puts coal only about 5% below its record high from late November.

Coal Shortage: China

This winter has been a rough one in China, and heating-fuel shortages around the country have led the Chinese government to halt all coal exports.

China is the world’s largest coal producer, although it consumed much of its own production. And even at that, winter shortages are common, with snowstorms blocking supply lines and intense economic growth feeding the need for more power.

Coal supplies about 75% of the electricity in China. And consumption has only grown in the last few years, even as the country tries to move to cleaner energy sources.

It’s not clear yet how much coal China is going to take off the global market. Considering how much of its supplies it normally consumes itself, the impact could be slight, or it could drive the price up even more in coming months.

Winter isn’t short in China, and the ban on exports could last through spring thaw if shortages continue to be a problem. And rising coal prices in March would be something to write home about.

Without all of those delicious foreign sales, I wouldn’t like to bet on a Chinese coal company in coming months, but the longer the coal shortage in China and mine closings in South Africa continue, the more bruised you’ll get kicking yourself for not getting into a good coal company in the U.S. or Australia before it's too late.

Just remember, if you are going to play the coal shortage, get in soon, before investors can see spring on the horizon, and find a pure-play coal miner. Even though investing in BHP or Xstrata is easy and obvious, you don’t want to get hit by a drop in another commodity as coal continues its high prices.

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