Coal does not find favour with developed countries — jealous about protecting environment and quality of air. Yet, thermal coal, which is burnt to produce electricity, and metallurgical coal, which is fed in blast furnace to make steel, will arguably be sizzlers of commodities this year, bringing back memories of their runaway price inflation in pre-recession 2008. This is because both electricity and steel producers, particularly in Asia, will need more coal as supplies from Australia remain hit.

Since the beginning of 2011, thermal coal has advanced 35 per cent to $145 a tonne. The spot market for coking coal, though highly illiquid, has also seen unnerving price rise for steelmakers. As against the contract price of $225 a tonne in the January-March quarter, deals for coking coal in the spot market are made at $300 a tonne and more.

More than the World Steel Association forecast that the global steel demand will grow 5.3 per cent to reach a record 1.34 billion tonnes in 2011, coking coal price rise in the past few weeks were triggered by production loss in mines and supply disruption in flood-ravaged Queensland in Australia. Queensland supplies 90 per cent of the country’s export of steel-making coal. Australia — accounting for nearly two-thirds of the world’s coking coal exports — feared supply disruptions can only be partly improved by incremental supplies from Canada, which itself is reeling under a severe winter, the United States that is seen as a swing supplier and Mozambique.

The Australian woes are a major concern for Indian steel industry. A significant portion of Indian steel is produced by the blast furnace route where coking coal is used as the reducing agent. The quality of our own coal is nothing much to write home about, and therefore, in the past financial year, out of our steel industry’s 40 million tonnes’ requirement, 23 million tonnes were met by imports.
Besides, we have been importing 10 million tonnes of coke annually to be used by secondary steel producers. An Ernst & Young report presented at the recent Global Steel Conference noted the country’s coking coal requirements will rise to 90 million tonnes by 2020.

Australia figures the most prominently in our sourcing of coking coal. Besides the price rise, stalling of shipments of the commodity from ports in Queensland is a cause of discomfort for steelmakers in India and other Asian steel-producing countries.

But some Indian steel groups took the weather forecast of a wet summer seriously and imported more than normal in December. In context of Australian supply disruptions, Tata Steel Managing Director, H M Nerurkar, said it had “sufficient supplies” in place. Similarly, Gujarat NRE has built a coal inventory to take care of the next four months.

Queensland’s incessant rains and flooding, the worst in 50 years, have left open pit coal mines under water, thereby damaging many equipments and rail lines between mines and ports twisted or washed away. Coal stocks at port are discomfortingly low, as rows of ships await loading. “The damage is extensive. In a blue sky situation, it will be three months before supply from Queensland mines become normal,” according to Gujarat NRE Chairman, Arun Jagatramka, who owns coal deposits in Australia but not in the flood-hit areas.
Companies rarely invoke a force majeure clause in contracts offering a legal let-out for suspension of sales obligation. In Queensland, miners such as Rio, BHP, Anglo American, Xstrata and Peabody are left with no option but to take cover under this clause. Jagatramka estimates coal production loss in Queensland at 30 million tonnes, primarily metallurgical kind. In such a situation, all agencies — from Macquaire to McCloskey to Morgan Stanley — are matter of factly engaged in guessing the coking coal contract price for the April-June quarter. The estimates range from $300-400 a tonne.

Assuming the next quarter contract price will be $300 a tonne, the average will finally work out to $260 a tonne, as the volume covered by force majeure will have to be supplied at the earlier quarter rate, Jagatramka says. It is not surprising that as production loss is to propel prices upwards, the BHP proposal to shift quarterly contract to monthly mode to better reflect spot prices is widely discussed. The monthly contract will appeal to steel mills, as they will be in the proposed regime locked in for a month instead of a quarter.