TALK TO AN EXPERT: Bart Melek Makes The Case For Coal
will eventually start unwinding and we think prices
Bart Melek
In our latest conversation with BMO
Senior Commodities Analyst Bart Melek,
we discussed how the Great Recession of
2008/2009 ravaged demand for coal, and
how that demand is once again picking up.
Rebounding demand associated with firm-
ing industrial activity and electric power
requirements, higher cost of competing
fuels and coal supply cuts bode fairly well
for the U.S. coal market into 2011, Melek
reports. This is good news for coal explor-
ers and producers, particularly in North
America where so much power consump-
tion is fed by giant coal deposits from Pow-
der River in the US to Alberta in Canada.
R
esource Intelligence: The price of coal fell by al-
most 50% in 2008, as production was slashed
due to a plummeting power demand with the
so called Great Recession. How quickly will that
pick up—and how quickly has it already picked up?
Bart Melek: 2009 was a very weird year for thermal
coal, especially in the United States. What we have
seen is very low natural gas prices. Relative to coal
they were extremely low. At the same time we had
industrial coal production in the US drop some
10%. That essentially meant you had the freedom
to move from base loads to peak-load generation.
That normally does not happen and what we have
seen is the amount of power generated by coal
drop to 44%, in I think August of last year, where
normally it’s about 50%. That was a problem and
caused inventories to build up and prices fell.
More recently we’ve had natural gas prices jump
from the summer lows and that relative price has
moved higher, demand for coal power is returning
and as such I think at this point, we are back to nor-
mal generation of power using coal. Ultimately sup-
plies were cut as well in the US. Those inventories
64
BM: Well, it has been happening recently, because of
are going to firm up.
RI: What are the main drivers of coal demand?
BM: Electricity demand is the key driver of U.S.
thermal coal demand, and last year was no excep-
tion. The sharpest decline in U.S. economic activity
since the Great Depression dramatically reduced
electricity demand in the U.S., down almost 4%
over the course of the year. Since electricity supply
and demand must always be in balance, demand
declines automatically precipitate a decline in gen-
eration activity.
RI: Why does natural gas have such a notable effect
on the price of coal?
BM: The two are to some extent alternatives, at least
in terms of power generation. Coal is primarily
used for power generation and if you have a low
gas price you can use gas to fuel plants that generate
electricity instead of coal. As non-coal prices rise,
the incentive to use sources other than coal fall. So
natural gas, especially last year, was very material in
determining the future for thermal coal.
RI: With changing attitudes to global warming,
what do you think the long term fundimentals are
for coal? Will a greener attitude toward energy pre-
vail, or will coal prevail as one of the cheapest forms
of energy?
BM: Certainly, it is one of the cheapest sources of
energy and frankly—for the US and North America
in particular—half of our generated capacity is coal.
These are very low, very difficult structural issues
to change overnight. We will likely have higher
power demand over time and we will have limited
choice of what source of energy to use, so I think
coal will continue to get used. At the same time, for
environmental reasons I think coal development is
not as robust as some would like and supply is con-
strained. Demand, like it or not, continues to move
to the upside, because there is nothing else as plen-
tiful and affordable to burn. We recently had an
announcement from President Obama that carbon
taxes are probably not on the cards at this point.
RI: I know you don’t look specifically at companies,
but what do you think is the first thing investors
should look for in coal miners when assessing their
project as an investment? Is size the central factor in
finding the right deposit?
BM: I’m a cost guy. I think high quality deposits
with close proximity to market are the best deposits
for investors to be looking at.
RI: That would be because of the reduced cost of
transportation. So location sounds like one of the
top factors that you look for, but interestingly coal
is transported great distances these days—to China
for example, and from China to the US, from time
to time.
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the really high price environment, but typically it
doesn’t happen.
RI: So are we seeing different kinds of increases or
decreases in the price of the varying kinds of coal.
For example you mentioned thermal and its pros-
pects, but what about metallurgical coal?
BM: The price of metallurgical coal has been run-
ning high. It’s a very small proportion of the total
coal industry, but it is primarily used in and essen-
tial to the manufacturing of steel. China has been
importing a lot more metallurgical coal than it
normally does because of the relatively cheap ship
freight rates, seaborne freight rates, because of the
recession and a large supply of ships that came in
recently. So metcoal [metallurgical coal] has done
extremely well and has recently been trading on
the spot between $180-$200. The steel industry is
likely to recover globally. We remain fairly robust
in China and that means the limited supply of
metcoal that’s out there is going to be quite valu-
able and we certainly have seen that typically coal
markets, including thermal in the Asian sphere,
have been performing better than in the West and
that is probably due to the fact that there is a lim-
ited supply out there but also because the demand
side is much stronger in the developing countries,
especially in Asia and China.
RI: What are your price predictions for thermal coal
in 2010 and beyond?
BM: BMO projects Nymex Central Appalachia
thermal coal to average US$58.40/tonne in 2010
and US$65.90/tonne in 2011. Long-term prices
are projected to be US$68.30/tonne, which BMO
calculates is a level required to sustain the industry.
RI: China already has huge deposits and is one of the
biggest coal producers in the world. Why are they
shutting down mines lately?
BM: Firstly they have had some safety issues and
secondly, a lot of their material isn’t of particularly
high quality and is more expensive to mine.
RI: What are the main factors that push the price
of coal?
BM: Demand for power and the price of oil as well,
I think, plays a big part in the price of coal. Energy
broadly is more expensive and the price of coal re-
flects that today.
The other thing that affects the price of coal of
course is the supply side. The availability and cost
of it’s competition, which are of course oil and gas.
These factors are very much a regional issue, how-
ever. Much of the gas around the world isn’t really
shipped, but used locally. So if there is cheap lo-
cal natural gas, that can be used as an alternative to
thermal coal, but if there is no alternative, coal will
be bought and used.