Coal's Return to Fashion

Coal's Return to Fashion

By ANDREW PEAPLE

Rumors of coal's demise increasingly look premature. The commodity has plenty of critics, concerned about its environmental impact. But even more-pressing safety concerns about nuclear power, after Japan's earthquake, could lead countries to raise coal usage to make up for energy shortfalls. Meanwhile, U.S. regulators this week gave coal-fired power plants some breathing space. With thermal coal supply already constrained, that should lead to higher prices—and extra profits for producers.

The delicate balance in global coal markets means any demand shift can lead to significant price swings. Major coal-producing areas such as Australia, South Africa and Colombia were hit by severe weather in the first quarter, leading to supply constraints. Deutsche Bank already expects a market deficit this year, with total seaborne thermal exports at 805 million tons and import demand at 823 million tons.

The price effect may not be uniform. Japanese demand will soften near term as coal users face production outages: Tohoku Electric Power, Japan's second-largest thermal coal importer, this week suspended its coal imports because of damage to its generating plants. Spot prices for Australian coal, the source of 70% of Japanese imports, have fallen 4% this week to $123.50. But if the plants come back online coal usage could rise in the second half. Citi estimates demand for thermal coal in Japan could increase by 7 million tons this year overall.

.In Europe the shift could prove quicker: Previous expectations of declining coal demand are now rapidly being reversed. Germany's decision to suspend seven nuclear reactors is key: The lost electricity generating capacity will have to be made up in part from coal, adding around 3 million tons of European imports in 2011. Deutsche now forecasts European prices could rise to $145 per ton next year, from around $122 now.

Meanwhile, the U.S. Environmental Protection Agency appears to have softened its line on coal-fired power plants this week. The EPA wants a 91% reduction in mercury emissions from power plants, which had led some analysts to predict mass shutdowns of coal-fired stations unwilling to invest in the necessary filtration equipment. Credit Suisse, for example, forecast 60 gigawatts, or 18%, of capacity to close. But the EPA now estimates that figure at just under 10GW.

There are clouds to this rapid reassessment of coal's prospects. Natural gas could prove a cleaner, more popular replacement for nuclear power. Nuclear capacity shutdowns might prove shorter than expected. And governments may also seek to promote other energy sources like wind and solar more strongly, although these remain higher cost and less reliable than coal.

But major producers—such as Xstrata, Anglo American and Bumi Resources—could now have a powerful adjunct to the story of growing Indian and Chinese coal demand. A week is often said to be a long time in politics. For global coal markets, this last one may turn out to have been highly significant.

Write to Andrew Peaple at andrew.peaple@dowjones.com