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Power generators and metal makers are most exposed to spiralling coal prices, with little chance of escaping being locked into pricey long-term deals this year, those in the sector say.
The full impact of record coal prices will not hit steel makers until May or June, when many term contracts will be re-negotiated to reflect the huge increase since early 2007.
Prices for the hard coking coal used in the metals sector have more than doubled in the last year to as high as $210 a tonne and most analysts expect prices to remain high throughout 2008.
China and India have gobbled up huge quantities of both thermal and coking coal to fuel their power stations and make the cement supporting their building booms, while production problems in key exporters have slashed supplies.
"Prospects for both thermal coal and most other coal markets remain very strong and we believe that upside risks exist on price forecasts," analysts at Swiss bank UBS said in Feb. 5 research note.
"Current price levels probably have yet to reflect how tight the market for thermal coal really is."
Power and steel producers have little option but to reduce output or scramble to secure ever more pricey and scarce coal cargoes.
They then face the problem of passing increased costs onto their customers at a time when demand for manufactured goods outside Asia looks uncertain amid growing fears of a recession in the United States and Europe.
"By the time the coal contract price hikes kick in in June time, the global economy may be somewhat less robust," said Ronnie Cecil, a senior consultant at commodities specialists CRU Analysis.
"Overall the metallurgical coal market is still a case of supply trying to catch up with rapidly growing demand. The whole supply demand situation is extremely tight. It's going to remain very tight this year," he said.
Power generators are already having to pass on the cost of rising coal and other fuel prices to their customers, or switch off their coal plants and fire up more gas plants if they have any, with little chance of relief in the short to medium term.
"Obviously the cost of buying the product is rising all the time so inevitably we can't continue to absorb all those rises," said John O'Neil, coal trading manager at Scottish Power which burns about 6 million tonnes a year of coal.
ScottishPower blamed a near doubling of coal costs when it raised power prices for its UK power customers last week. But O'Neil said the Spanish-owned company had avoided passing on the full impact of the surge in costs yet because it has hedged against price spikes with long term contracts.
He was also hopeful coal prices could ease in the longer term, pointing to significantly lower futures prices for 2009 and 2010, reflecting expectations of more supply from Colombia, Australia and Indonesia and a fall in shipping costs.
The cement industy rivals power and steel in its reliance on coal. But many cement makers outside Asia have been able to switch from coking coal to cheaper petroleum coke, dervied from oil.
"With the higher price for coal since mid 2007 practically everyone has stopped using it because it's simply too expensive for us… We have 95 per cent abandoned coal because of this," a senior European cement industry source said. (Reuters)
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