Perfect Storm for Thermal Coal Brewing

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Perfect Storm for Thermal Coal Brewing

By Tim Maverick, Staff Writer

Thermal coal has been one of the weakest-performing commodities for the past two years, but not for long . . .

A shocking decision by an Indian court could spark a huge spike in thermal coal imports in the country.

India is already the third-biggest thermal coal importer in the world, and the court’s decision means the country is going to be buying even more soon.

While most people see thermal coal as a commodity that’s going nowhere fast, savvy investors can get ahead of this impending shift.

Too Much of a Good Thing

Even though thermal coal provides 40% of the world’s energy, inventories are growing much faster than demand . . .

The largest shipper of thermal coal, Glencore PLC (GLNCY), says that shipments of thermal coal rose 22% over the past two years. With demand only increasing 18%, all the excess supply slowed the market and lowered prices.

This has sent prices cratering . . .

After landing just above $130 per metric ton in 2011, the benchmark price of thermal coal tumbled nearly 50% to below $70 per ton this year.

Now, big suppliers from places like Australia and Indonesia have slowed production. And these supply cutbacks have successfully stabilized the price of thermal coal on the spot market.

But with this new demand from India on the way, the market could take off again soon . . .

India, Coal, and the Courts

The Indian Supreme Court recently dealt a huge blow to the country’s domestic coal sector. A ruling handed down last month stated that many of the 218 coal licenses issued to companies since 1993 were awarded illegally.

This is throwing the whole sector into turmoil and creating a perfect storm for thermal coal imports.

Even if the court is lenient, and only a handful of the 30 or so operational mines across the country are forced to close as a result, India’s imports of thermal coal are set to skyrocket!

Thermal coal is responsible for generating two-thirds of India’s electricity. Now that domestic supplies are set to drop, demand for imports will increase.

Macquarie Bank estimates this court decision may raise India’s coal import bill by around $3 billion to pay for an additional 38 million metric tons of coal.

Plus, thermal coal is a huge part of India’s economy, and the country’s leaders definitely don’t want to lose any momentum. The latest gross domestic product figures show robust growth of 5.7%. That’s the fastest rate in two years, pushing India’s stock market to record highs.

On top of all that, as of late August, half of India’s power plants only had enough coal to last about a week.

Also keep in mind that even at its peak generating capacity, power generation in the country falls 10% short of demand. And some of the newly added power generation in India is expected to be coal-based, too.

Riding the Wave

The bottom line here is that India is going to be importing a lot more thermal coal.

Consultancy Wood Mackenzie forecasts that India needs the equivalent of 88% of the seaborne coal surplus this year.

The events in India are no doubt behind Glencore’s best thermal coal forecast in years. The company now believes that demand for thermal coal will begin to outpace supply in 2015.

This will boost the fortunes of the coal suppliers.

Glencore should benefit hugely, as well as Noble Group (NOBGY) in Indonesia and Whitehaven Coal (WHITF) in Australia.

And “the chase” continues,

Tim Maverick

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By Tim Maverick