Coal prices hit records too - time for biomass?

Record oil prices are receiving a lot of media attention, but a quarter of the world's primary energy demand is met by coal. The most climate-destructive fossil fuel is used to generate around 40 percent of all electricity. And like oil, coal too is now experiencing all time highs. Record prices and tight supplies are piling the pressure on electricity generators so much that several industry players predict some utilities may even be forced to scale down operations. Physical coal prices for delivery into Europe have risen by over 50 percent this year to hit records over $100 per tonne.

The coal market is highly opaque and prices are not straightforwardly correlated to those of other fossil fuels. Some analysts however argue that higher oil prices translate to higher coal prices, because higher oil tends to push up natural gas prices, which in turn drives coal prices. Coal must also adjust upward to reflect the costs of energy-intensive mining. Large miners consume millions of liters of diesel annually to run their heavy mining equipment. If the price of oil and petroleum products rises significantly, companies will face millions of dollars in added costs - an evolution already being felt by Peabody Energy, the largest coal producer in the U.S. Natural gas and coal prices are also correlated because of demand for electricity. Add high freight rates for coal importers and the picture looks even more grim.

The current situation has some analysts worried that utilities and cement producers, also big coal users, may even be forced to scale down operations. One coal producer, quoted by Reuters, said:

The market is having to adapt to coal prices, to freights, which we've never seen before. I do believe that before the end of the year it's possible that some generators in Asia will have to look at turning off their plants because they won't have enough coal.

Physical coal prices last week surged to a record $102.00 a tonne delivered into Europe, from $65.00 in the first quarter, because rampant demand in Asia has sucked in millions of tonnes originally destined for the Atlantic market. Power generators, Europe's biggest coal consumers by far, buy most of their coal on rolling long-term contracts from producers but usually purchase a small proportion from the spot market. Coal-fired generation is used most heavily during the winter months when it is usually the lowest-cost fuel.

Some European regions can switch from coal to biomass, hydro, wind or gas-fired, notably Scandinavia, Germany and Iberia, but most European utilities rely on at least some coal-fired generation. Germany's E.ON AG, Italy's Enel and Spain's Endesa are among the utilities currently seeking coal for Q4 and Q1, market sources said.

One European utility recently paid close to $115.00 a tonne CIF for a South African cargo which it bought to replace delayed shipments of other origins. European cement companies said they also recently bought at prices far higher than those indicated on the globalCOAL trading platform or by published weekly coal indices:
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Xstrata Plc, the world's largest thermal coal producer, recently settled 2008 thermal coal supply contracts with two Korean utilities at as high as $68.50 a tonne, two sources said last week. State-owned utilities Korea South East Power Co and Korea East West Power Co have agreed to buy coal from Xstrata's New Lands coal mine at $68.50 a tonne and $65.50 a tonne for coal from the Rolleston mine, they said.

Reuters quotes a trader as saying 'so many utilities and cement companies are looking. They will pay but they are desperate that nobody finds out.' In the coal sector it is not done to admit that one is 'looking'.

Consumers pay up
A large European industrial consumer of coal said his company had struggled recently to find enough coal of any acceptable origin and had no choice but to pay the price asked by the supplier. 'In Europe anyway, I think you will be able to find enough coal, but it won't be easy and you'll have to pay up,' a further trader said.

Consumers everywhere have had to adjust to paying prices higher than anybody imagined were ever achievable. Record freight rates have boosted delivered prices but free-on-board coal prices at origin have also hit records this year for Australian, Russian and Indonesian coal.

What everybody wants to know is when freights are going to fall, if they're going to fall or if we're just going to have to live with it, a major Indian trader said.
The acceptance of soaring prices by Indian end-users took many traders and producers by surprise. The same trader is quoted as saying:

We used to say India was totally a price-driven market and nobody would buy South African coal for more than $50 FOB but the consumers have had no choice this year," the Indian trader said. I think they will be paying $120 a tonne CIF by the end of the year - they'll have to or have no coal.

South African spot FOB prices are often taken as a good indicator of the cost of coal because its quality is acceptable to most consumers. Spot South African FOB prices are at about $65.00, having stayed at around $60.00 for most of the year but are expected by suppliers and consumers to reach $70.00 within weeks.

Biomass to play a role?
Record coal prices have made some utilities look at buying biomass to co-fire with coal, as 'opportunity fuels'. Some residues from agriculture and forestry - such as pelletized coffee husks or palm kernels - can be shipped efficiently over long distances because they have a relatively high energy density. However, the same high freight rates would apply.

Nonetheless, a working carbon market in Europe, with current prices at around $30 per tonne, may make the use of carbon-neutral biomass attractive for utilities. Supplies would come from the Global South, because they tend to be less costly than biomass produced in Europe.

One power generator in the Netherlands, Essent Energie, recently agreed to purchase several thousand tonnes of coffee husks from Brazilian coffee producers, to co-fire the biofuel in one of its large coal power plants in the Netherlands and to sell the electricity under a green label. However, it is not clear which factor was more important for Essent: the creation of a 'green' corporate image or the fact that biomass has become competitive with costly coal?

Even though international biomass trade is growing rapidly, as yet there is no formally established global market nor any robust trading mechanisms and market information. Moreover, the physical international trade in biomass from the South to the North competes with the potential to use this biomass locally as part of, for example, Clean Development Mechanism projects which result in carbon credits. However, many regions and millions of farmers on the planet produce vast streams of excess biomass that remains available, even when all local energy needs are met by bioenergy, which implies that the rationale for physical trade remains strong.

References:
Reuters: Record coal prices hammer power generators - September 28, 2007.

Dow Jones: Rising Oil Prices Seen Pushing Costs Higher For Coal Miners - September 28, 2007.

Reuters: Xstrata fixes '08 coal contracts with Korean gencos - September 27, 2007.

Essent: World scoop: Green electricity from coffee husks - July 10, 2007.

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