The End Of China

Merrill Lynch has raised its forecasts for contract prices of coal for power plants and steel mills in 2008, predicting that prices will jump by as much as 200 percent, after recent supply disruptions resulted in a severe global shortage.

Contract prices for coking coal, used to make steel, are expected to reach a record high of $300 a tonne, a three-fold rise from an agreed price of $98 last year, amid a "supply apocalypse" following recent weather-related supply disruptions in Australia, Merrill Lynch said in a research note on Friday.

Japanese utilities, such as Chubu Electric Power Co, may need to pay miners in Australia $135 a tonne for coal contracts in fiscal 2008 beginning April, up 143 percent from last year's agreed $55.65, Merrill Lynch said.

Merrill Lynch had previously forecast 2008 thermal coal prices at $80 tonne.

"There is now an obvious scramble for supply with industry sources confirming that Asian steel mills are begging for tonnes at close to any cost," Merrill Lynch said in a report led by Vicky Binns.

"Under current market conditions, spot prices reflect the 'hysteria' of the supply shortage and therefore spot appears a reasonable guide for contract settlement."

Merrill Lynch estimated that recent flooding in Australia's Queensland state to have removed about 15 million tonnes of coking coal from the export market. As for thermal coal, Merrill Lynch said recent supply disruptions from Australia, China and South Africa, combined with powerful Asian demand, would result in supply deficit of a 60 million tonnes for thermal coal this year.

"Thermal coal's already very tight seaborne trade has been devastated by two, simultaneous supply-side shocks in the last 4-8 weeks: widespread destructive winter storms in China prompting a ban on exports and South Africa's power shortages," Merrill Lynch said.

The thermal coal market is expected to be under-supplied for the next three years as key export countries struggle to expand their port facilities, Merrill Lynch said.

Brokerage Goldman Sachs JB Were said in a client note on Wednesday that prices for coking coal and thermal coal were expected to reach $200 a tonne and $130 a tonne, respectively.

Australia is the world's largest exporter of coking coal.

Extreme weather in coal-rich Queensland state in the past two months have prompted six producers, including BHP Billiton Ltd, Rio Tinto Ltd and Xstrata Plc to declare force majeure on shipments.

Source - Reuters [March, 2008]