RE: BTV-Business Television Features Novadx VenturBEIJING—China's growing appetite for imported coal has ignited coalprices and fueled deal making on the belief that the country, once amajor coal exporter, will be a long-term buyer of foreign coal.
Last week, the benchmark price at Australia's Newcastle port forthermal coal—the type burned in power plants—hit $108 a metric ton, thehighest since October 2008, according to globalCOAL, an internationaltrading platform. Australia is one of China's biggest coal suppliers.
China's coal-importing binge started last year when internationalprices were low as a result of the recession while Beijing's stimulusspending kept domestic prices relatively high. With coal the primaryfuel for China's economic engine, the buying is continuing even asglobal prices rise. China's coal imports in March jumped 165% from thesame month last year.
The country's growth amid the global economic rebound is alreadydriving up a swath of commodities, including iron and oil. But so far—atleast for coal—prices remain below the pre-recession highs of 2008,when Newcastle coal breached $180 a ton.
Still, in March, Goldman Sachs raised its estimates for global coalprices, with supplies of certain types of coal remaining tight through2011 because there aren't a lot of new mines opening soon.
In a quarterly report, the China Electricity Council, an industrytrade group, recently warned that demand for thermal coal used in powerplants would remain high for the rest of this year because of stronggrowth and supply constraints. More than 70% of China's electricitycomes from coal-fired power plants, and the country's power-generatingcapacity is expected to expand another 10% this year.
The surge in Chinese demand is prompting acquisitions. Last year,Chinese miner Yanzhou Coal Mining Co. bought Australia's Felix ResourcesLtd. for $3.2 billion. St. Louis, Mo.-based Peabody Energy Corp.,meanwhile, is trying to buy Australia's biggest coal exporter, Macarthur Coal Ltd.
For decades, China was a net exporter of coal, selling some 83million metric tons more than it bought internationally in 2003. By2007, that had started to change, with China recording net imports insome months, a development that helped send global coal prices to recordhighs.
But last year trade swung dramatically, with China importing nearly126 million metric tons and exporting just 22 million. China swallowedmore than a fifth of the 600 million tons of total seaborne-coal tradelast year, jolting the global coal business at a time when steel millsand power plants elsewhere were sidelined by recession. The trend hascontinued this year, with coal imports in the first three months of 2010jumping 226% from a year earlier to 44.4 million tons. That is still afraction of China's overall consumption, which amounted to 1.4 billiontons of coal in 2008.
"Coal producers and freight operators were dreading the economiccrisis and then China came to the rescue, single-handedly supportedprices and stopped them from falling further," said Zhou Xizhou, ananalyst at IHS Cambridge Energy Research Associates.
Suppliers are scrambling to keep up. Vic Svec, head of investorrelations for Peabody Energy, estimated that Asia will add enough powerplants in the next three years to burn the equivalent of a billion moretons of coal annually, with most of that new demand from China.
Mr. Svec said Peabody has long sold China coalfrom its mines in Australia, but in the past two years the company hasincreased shipments from its Powder River Basin mine in Wyoming. Pricesfor contracts in 2014 are higher than prices for coal for immediatedelivery, he said, a sign that traders think the supply-and-demandbalance will be tighter in the future.
Beyond that overall growth in demand, the import surge also stemsfrom a growing mismatch between the coal China produces domestically andthe coal it needs. China has some of the world's biggest reserves oflow-quality thermal coal, but such coal tends to have higher levels ofpollutants like sulfur.
The newer, cleaner power plants being built require better grades ofcoal. And many of those plants are on the coast, where it can be lessexpensive to buy seaborne coal than to bring it by rail from China'sremote inland regions, where most mines are.
China also has inadequate domestic supplies of higher-grade cokingcoal, which is a key ingredient for making the steel that feeds thecountry's booming construction industry. Coking coal and other types ofcoal used to make steel, known as metallurgical coal, accounted for 27%of China's coal imports in 2009, from 16% in 2008, according to J.P.Morgan.
Some factors driving China's coal buying are temporary. A key reasonfor March's big jump in coal imports was a major drought in southwesternChina that left rivers too low to power hydroelectric dams, causinggreater reliance on coal-fired plants. Meanwhile, a string of miningaccidents in recent weeks has prompted a nationwide safety crackdownthat could slow production, according to J.P. Morgan. And to boostsafety, the government last year began a consolidation of mines thatreduced output.
There is a big risk that could reverse China's demand for coal: Thehousing boom could stall. But many analysts think that is unlikely tocurb demand for steel and coking coal because the government recognizesthe need for the construction sector to drive the economy.
Write to Shai Osterat shai.oster@wsj.com