Coal Price Outlook 2012

A mild winter has impacted coal shipments in the United States.

Coal in Asia is unlikely to recover in 2012 from its first decline in three years as electricity-price controls in 2011 prompted Chinese and Indian utilities, Asia’s biggest energy users, to limit purchases of the fuel. According to the median estimate of six analysts and traders surveyed by Bloomberg late last year, thermal coal at the Australian port of Newcastle, a benchmark price for Asia, is expected to average about $118 a metric ton, in 2012. Prices averaged roughly $122 in 2011. Coal at Richards Bay in South Africa, which supplies Asia and Europe, is also expected to trade lower with analyst estimates at about $111 a ton in 2012, down from $118 in 2011, the survey showed.

According to China Coal Transport and Distribution, China may slow imports of the fuel this year after increasing shipments by about 10 percent in 2011. Rahul Bhandare, chairman of coal trader Knowledge Infrastructure Systems, thinks Indian purchases may also fall in 2012.

Demand issues are not limited to Asia, last week TECO Energy (profile NYSE:TE) lowered its coal sales forecasts for 2012 in the face of weaker demand and declining coal prices. TECO Coal owns and operates low-sulfur coal mines and handling facilities in Kentucky and Virginia. The company mines and ships almost 9 million tons of coal annually. TECO Coal’s primary customers include the United States and European steel industries, as well as domestic utilities and industrial customers.

The company cited a mild winter, low natural gas prices and slow economic growth as factors that have reduced demand for coal over the past four months. “At this time, rather than sell coal at current prices or build inventory, TECO Coal is scaling back production immediately and lowering its 2012 sales projections,” CEO John Ramil said in a statement.

In the face of reduced sales targets and the threat of class action lawsuits, U.S. coal companies Alpha Natural Resources and Walter Energy are well off 2011 highs as we start the new year. Alpha Natural Resources (profile NYSE:ANR) is currently trading at $20.19 down from last year’s high of $61.66 while shares of Walter Energy (profile NYSE:WLT) are currently being exchanged for $70.93 up $1.80 on the day but well off 2011 highs of $143.76. Despite negative market sentiments, brokerage Sterne, Agee & Leach recently upgrading Walter Energy from “underperform” to “neutral” contending contract pricing for its met-coal products may be close to bottoming.

Earlier this week, interlisted Australian coal developer Coalspur Mines (profile ASX:CPL – TSX:CPT) completed a bankable feasibility study for its flagship Vista project in Alberta, Canada. The export thermal coal mine is expected to be one of the largest in North America and the study reported a 30-year mine-life with estimated annual production of 11.2 million tons of coal each year. The cost of building the new mine is estimated at C$1.2 billion.

Coalspur CEO, Gene Wusaty, stated, “The positive results of the study confirm Vista’s potential as a first-class export thermal coal project. The study includes a very detailed evaluation of Vista’s productive potential and a comprehensive assessment of the capital costs required to develop the mine.” Notwithstanding analyst forecasts for 2012, Mr. Wusaty cited growing demand for thermal coal in the Asia Pacific economies supported the underlying fundamentals required to proceed with the development of the Vista project.

Mike Luft

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