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The great coal run, steelmakers feel the pinch

India - Steelmakers have began to feel the ripple effects of coal’s over two months’ bullish rally, with predictions indicating that the prices would spike much higher than expected in the on-going benchmark negotiations

Indian steelmakers were this week reportedly paying US$600 for a ton of imported coking coal after the price shot up from US$200. As steelmakers the world over became very concerned about the cost and supply of coking coal, the world's second largest steelmaker, Nippon Steel was forced to cut its profit forecast.

Anglo-Dutch steelmaker Corus, owned by Tata Steel, warned that higher coal prices would push wire rod prices 'substantially higher' for deliveries from April 28. Corus, which has already raised wire rod prices by between £70 and £90 a ton on deliveries from March 31, is unable to specify the level of further price increases due to the uncertainty in coal prices.

Most coking coal is traded under annual contracts, and the current contract price is $98, but the contracts currently being renegotiated.

In some regions steelmakers are working to set up their own coal supplies, according to Purchasing.com. It points to Arcelor Mittal which said this week that it would bid for state-owned Ukrainian coal mines which are expected to be sold this year to secure energy for its local unit and cut dependency on imports.

While prices for all steel products have been driven up by a combination of rising iron ore, scrap metal and energy prices and lower exports from China, coal supplies are extremely tight on international markets and stocks at many steelmakers are being depleted to dangerously low levels.

Floods and port congestion in Australia, as well as the suspension of coal shipments from other major suppliers like China and South Africa following power shortages that will require replenishment of utility stocks, have made the situation worse forcing steelmakers to turn to the spot market, where prices are about triple those in term contracts.

Coal spot prices have also been driven by demand from emerging markets, especially China and India. They reached US$300 a ton this week with coke being priced at US$600 a ton, against a coal price of $100 a ton less than a year ago, as analysts predicted that the end was far from over with the prices spiking much higher than expected in the on-going benchmark negotiations.

In a report ‘Black Gold', Citigroup's Citi Investment Research division expects the 2008-9 annual contract prices for both thermal coking and coking coal to double in the current round of negotiations.

And there is no ceiling in sight in terms of how far coal prices will go.

"When you have a look at where coal prices were say five years ago, when metallurgical coal was selling at $40 a tonne, I don't think we're going to be seeing those prices in the foreseeable future, if at all," ABC News quotes Australian resource analyst Alan Copeland as saying.

Last week Merrill Lynch raised its forecasts for contract prices of coal for power plants and steel mills in 2008, predicting a more than 200% jump in prices. In a research note Merrill Lynch expected contract prices for coking coal to reach a record high of US$300 a ton, a three-fold rise from last year's agreed price.

"Japanese utilities may need to pay miners in Australia US$135 a tonne for coal contracts in fiscal 2008 beginning April up by 143% from last year's agreed US$55.65," said the banking group, which had previously forecast 2008 thermal coal prices at US$80 per ton.

Purchasing.com says coal prices were one of the hot topics at the Reuters Global Mining Summit this week. It quotes Preston Chiaro, CEO of Rio Tinto's energy division, as saying the current record prices for thermal and coking coal will stay high as global demand remains strong and infrastructure struggles to keep up. Chiaro predicts the prices for thermal and coking coal to remain high through to 2011.

Gerard McCloskey, publisher of McCloskey's Coal Report, however predicted that the shortage of coking coal would persist for years, until the expansion of Australian rail and port capacity catches up with demand.

"People should be really worried; this is going to fuel inflation," McCloskey warned in a recent Energy Bulletin report.

But Goldman Sachs analyst Michael Molnar feels that the historically high spot prices will result in major companies increasing production, offsetting coal's shortages.

"The incentive of huge profits possible at current spot pricing will likely trump many of the barriers in getting production to market," he was quoted as saying by the Houston Chronicle.

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