Coal prices double – Moon of Alabama

January 5, 2005

Coal prices double

From today’s Financial times: Posco to pay double for Australian coal

Posco, the world’s fifth-largest steelmaker, has agreed to pay more than twice as much for high quality coal from Australian suppliers, in a deal that underlines the tight global supply of commodities.

The South Korean steelmaker yesterday said it would buy bituminous coal from BHP Billiton and Rio Tinto at $125 per tonne from April, up from $57.5 per tonne. "Raw material prices have surged as global demand exceeds supply," Posco said.

Why is this important? After all, this means first of all that Korean steel will get more expensive, thus probably also Korean cars ; that’s good for US exports, right?

Well, the first problem is that steel being a commodity, the price rises will apply to everybody – eventually (Posco agrees here to pay a little bit more to guarantee its security of supply), and there will be no competitive advantage for anybody – only bumper profits for those that control the natural resources (that’s good for Australia, Russia, maybe Canada and a few others), and increased costs – inflation – for everybody else.

The other big problem is that about 50% of US electricity supply comes from coal-fired power plants. Coal price increases, together with the natural gas price increases which have also taken place (gas-fired plants being the second source of electricity) mean that electricity prices are very likely to go up in the near future. This has mostly stayed under the radar so far because (i) retail prices are quite strongly regulated (ii) long term supply contracts mean that price increases take more time to feed through (iii) over-investment in the late 90s has led to temporary over-supply and depressed the electricity markets for several years.

This will not last. Expect one more item of negative economic news – and one that will hurt everybody, and especially the poorest – to the long list of unbalances threatening the US economy. I honestly don’t understand why US economists are almost unanimously optimistic about economic prospects.

Posted by on January 5, 2005 at 10:22 UTC | Permalink

Comments

Cross posted on Kos for increased visibility and to garner your support in electronic currency…

Posted by: Jérôme | Jan 5 2005 10:34 utc | 1

But Jérôme, the ‘public’ economists are optimistic because they are being paid for being optimistic. Forget about the ideals of the Enlightenment – all that counts is spin, the modern form of propaganda. When the s hits the f, they’ll be surprised and avow that the severity of the crisis could not be foreseen… and it will be somebody else’s fault anyway. It’s THEM: the Muslims – all of them fundamentalists -, and the Chinese, Old Europe, the corrupt, corrupt UN, and the old commies, and the bogeyman will be in it, too. There will probably be only one nation not to be blamed: the US, who have done nothing to deserve this. (We are expected to get emotional at this point.)
But who cares anyway: the people holding the power will not be hit by anything. It’s the people who would be excluded to live in their ghettos or would be sent off to die in foreign countries who will suffer the most. Same as it ever was.

Posted by: teuton | Jan 5 2005 12:06 utc | 2

If the Sun & Moon should doubt
They’d immediately Go out. (Blake)
My 2 cents reckons that if they can continue to garner eternal optimism, no-one will bother to look behind the curtain, and they can continue to pull the check/cheque writing trick for quite some time yet. The future? We’ll all be dead.

Posted by: DM | Jan 5 2005 12:30 utc | 3

BTW – Australia is practically a gigantic coal deposit. I don’t have any details at hand – but I am pretty certain there is enough easy coal here to supply the entire world for the next 10,000 years. If this stuff can be liquified – what’s the deal with these peak oil armageddon theories?

Posted by: DM | Jan 5 2005 12:37 utc | 4

Jérôme,
je n’ai pas d’information chiffrées à t’apporter mais il est évident que les tensions sur le marché de l’énergie vont en s’acroissant notamment en raison du développement économique de la chine et dans une moindre mesure de l’inde. Tu parles tout particulièrement du charbon mais la plupart des centrales thermiques sont capables de brûler du charbon et du pétrole n’est-ce-pas ?
j’aurais plutôt une hypothèse sur l’optimisme des perspectives économiques américaines.
Les acteurs américains du marché de l’énergie ne sont t’ils pas en train d’anticiper (ou de spéculer) une production de pétrole accrue en iraq. Je dis spéculer car à ma connaissance les infrastructures iraquiennes sont en très mauvais état et que les investissements doivent être importants avant de voir une production substancielle sortir d’iraq pour allèger le déséquilibre entre offre et demande
Dick Chesnais doit être particulièrment bien informé sur le sujet ainsi que les honorables membres de Carlyle ou Enron.
il est certain que ls plus pauvres (tiers monde et pays riches compris)en subiront les conséquences. Mais tout le monde ne va pas subir le choc de la même manière. Cela dépend de la structure de production énergétique de chaque pays.
La France a sans doute plus à redouter la flambée de prix dans le gaz et le pétrole que dans le charbon
L’Allemagne risque de sentir un peu plus le choc. Je crois qu’elle possède un parc de centrales thermiques important
je crois que tu es économiste les capacités de production charbon en Australie sont elles déjà au maximum ? La chine possède d’énormes réserves de charbon, elle en a besoin pour elle-même mais n’est-elle pas en mesure de fournir le marché mondial ?
Il m’apparaît évident que nous allons au devant d’énormes tensions sur les questions d’énergie. La question des économies d’énergie dans les pays riches va devenir une question plus que cruciale. Je lisais l’autre jour un article sur le fait que les USA étaient vraiement concernés par la question de l’énergie, plus que les européens mais ce que je vois c’est qu’ils sont plus concernés par l’approvisionnement que par les économies d’énergie. Toutes leurs politiques sont la démonstration de cela : environnement (Kyoto), énergie ( iraq, Vénézuela)
le philosophe Toussaint Desanti, en parlanr des ressources naturelles, disait en substante cela : les conflits du XXème siècle nous apparaitront comme de jolies kermesses en comparaison des conflits qu’il y aura au XXIème siècle. En ce qui me concerne je ne suis pas du tout optimisme
D’une certaine manière, la guerre en Iraq était une anticipation autoréalisatrice de Bush&co. ils ont surement lu Toussaint Desanti!…

Posted by: little condorcet | Jan 5 2005 12:39 utc | 5

les capacités de production charbon en Australie sont elles déjà au maximum ?
No way. Production and reserves are two different things. Plenty for everyone if the price is right.

Posted by: DM | Jan 5 2005 12:53 utc | 6

I may be prone to exaggeration – but I think the 200 years mentioned here is a tad conservative …

Of all the fossil fuels – oil, gas and coal – coal is by far the most abundant. It is estimated that there are around one thousand billion tonnes of total coal reserves economically accessible using current mining technology, approximately half of it being hard coal. Not only are coal reserves extensive, they are also geographically diverse, being spread over 100 countries and all continents.
These abundant reserves of coal mean a long-lasting and stable supply. In contrast to oil and gas, deposits of which are heavily concentrated in a few often politically unstable areas like the Middle East, current reserves to production ratios of coal are sufficient to last well over 200 years. This is approximately four times the level of known reserves of oil (some 45 years) and gas (about 65 years).
These figures do not take into account any additional coal resources thatmay be proved by on-going exploration; will become accessible as further improvements are made in mining technology; or, will become commercial through the increased use of presently uneconomic lower grade coals.

Posted by: DM | Jan 5 2005 13:07 utc | 7

and there will be no competitive advantage for anybody
Except the swedish, waterpowered steelmaking. And nails there shall be, nails for all the fundies in America…

Posted by: A swedish kind of death | Jan 5 2005 13:17 utc | 8

It has been estimated that, as of 1996, there are around one exagram of total coal reserves economically accessible using current mining technology, approximately half of it being hard coal. The energy value of all the world’s coal is well over 100,000 quadrillion Btu (100 zettajoules). There probably is enough coal to last for 300 years.

Posted by: Cloned Poster | Jan 5 2005 14:11 utc | 9

CP, you are using strange units there. Surely, you mean zetajones??
1 million BTU (MBTU, which is the usual British unit) = 1055 Joules
100,000 quadrillion BTU = 105 Terajoules
If you meant 100,000 quadrillion MBTU, then it’s 105 Exajoules
Mega (1 million), Giga (billion),Tera, Peta, Exa, Zetta, Yotta
Coal is certainly available in abundance, especially in the US, and can provide for several centuries of use at current rythms. The problems is that it is still, despite a lot of progress, polluting, through emissions of carbon in the air, of other pollutants unless stringent anti-pollution systems are in place (and one of the recent Bush decisions on that topic was precisely a relaxation of rules applying to old coal plants), and throughthe mining operations. Did you know for instance that there is more uranium pollution caused by coal mining than by uranium mining and utilisation?!
Australia has a lot of cheap-to-extract coal, and will profit from higher prices. But higher prices will also be used as an excuse (by electricity producers) to lobby against more stringent anti-pollution measures (scrubbers, carbon taxes, emission standards, etc…) as they add to an already growing cost… Remember that australia is the only other significant country out of the Kyoto treaty, for a reason…

Posted by: Jérôme | Jan 5 2005 14:35 utc | 10

Jerome, there are a couple of possible modifications to your point. The coal being purchased by Posco is metallurgical coal. It will be used to make coke, not to fire boilers. Metallurgical coal is more expensive than regular coal, and the two don’t really compete against each other. It is remarkable, though, that prices for what is still a commodity could rise so highly so quickly.
The second point is about the impact on finished good prices. A lot of steel, including over half the steel in the United States, is made from scrap in electric arc furnaces. While higher coal prices will have some effect on steel prices, it’s probably going to be relatively minor. Second, and more important, steel represents a surprisingly small portion of the cost of producing most consumer goods. We think of a car as being mostly steel, for example, but the cost of steel is currently only about $500 out of $26,000 for a new car.
Your post, though, raises a troubling possibility — could metallurgical coal be a signal, a “canary in the coal mine,” of what’s going to happen to commodity prices in general? Most commodities are priced in dollars, so the falling dollar eventually has to result in higher commodity prices. Beyond that, I still don’t understand why inflation in the United States hasn’t been higher, given the record trade and budget deficits. Apparently the Federal Reserve has been wondering the same thing. Is it possible that the large companies that deal in commodities are actually ahead of the curve, and are raising prices in anticipation of substantial increased inflation in the United States?
Sorry for the long post. I happen to have done a lot of work on the relationship between raw material prices, steel prices, and finished goods prices, and even published some in the area, so this is one of the few things I can claim to be a semi-expert on. You have an infinitely better understanding of international commodity markets than I do, though, so I would really like to hear your further thoughts on this issue.

Posted by: Aigin | Jan 5 2005 14:37 utc | 11

OK so it is agreed then. We have enough coal to burn up the atmosphere in record time. I suggest taking a globe (map of the earth), do a few calculations, and get a visual image of just how much air we have to waste.
For those of you who are mathematically challenged or too lazy to take the trouble, here are a few rough numbers:
The air layer may be about 20 miles thick, or 100,000 feet. In most of that thickness the molecules are quite far apart so there isn’t much mass. So lets scale it down from an 8000 mile earth diameter to one foot, the size of our little globe, a ratio of 1/42,000,000. That is a 500 millionths of an inch thick layer of air clinging to the surface of our little one-foot diameter globe.
One-half a thousanth of an inch, .0005 in. which is a lot thinner than a piece of Saran wrap. This is all we have to burn up all that coal with. Once most of it is converted to carbon dioxide we’ll be left with a little global greenhouse where nothing but the simplest micro-organisms can survive.
Moral: Don’t dig more coal; burn less.

Posted by: rapt | Jan 5 2005 14:54 utc | 12

I too am surprised that the 1970’s malaise has not hit the US. But, don’t tell me inflation hasn’t hit: insurance, property taxes, parking, haircuts, electricity, gasoline have all gone up in the last six months. Three things have prevented the full impact of trade and federal deficits from affecting Americans: 1) Selective reporting and propaganda, 2) Food prices are constant, and 3) China and Japan continue to undervalued their currencies.

Posted by: Jim S | Jan 5 2005 18:03 utc | 13

@Algin, DM, and CP:
I agree with you all.
There is a significant difference price wise between metallurgical(steel-making coal) and steam(power plant firing) coal, and they don’t really compete.
US has at least 300 years supply of steam, less of met, at current rate of use.
No shortage of either met coal or steam do I see for a long, long time.
It would be interesting to know why the S. Korean firm did what they did,at that price, at this time.
Hell, at that price you could probably ship met out of Hampton Roads, Virginia and compete.
Forget about coal to Newcastle.

Posted by: FlashHarry | Jan 6 2005 2:50 utc | 14

Correction to Jan.5 post.
The air layer on the twelve inch globe is .030 inch, a lot thicker than a sheet of saran wrap.
I’m breathing easier now. Sorry for the misleading numbers.

Posted by: rapt | Jan 6 2005 14:15 utc | 15

slothrop
Can anybody suggest really good book covering deep/peak oil debate?

Posted by: slothrop | Jan 6 2005 16:05 utc | 16

slothrop
THE PARTY’S OVER, subtitle Oil, War and the Fate of Industrial Societies, by Richard Heinberg, copyright 2003, New Society Publishers, ISBN 0-86571-482-7. It’s written in layman’s language plain enough so even an old lady like I can easily understand…and be glad I am old and will probably not be around long enough to worry about the outcome.

Posted by: hobbitess | Jan 10 2005 2:43 utc | 17

@slothrop: Deffeyes (petro-geologist), Hubbert’s Peak — excellent explanation of oil deposit formation, detection, mapping, extraction, processing, history of Hubbert and his peak oil prediction. I disagree with Deffeyes on a number of points (he’s underinformed about sustainable ag for one thing), but it’s a good read and a good reference.
also A Green History of the World (Ponting) which discusses (among other things) the fate of single-resource cultures when the single resource starts to run out… two chapters devoted to fossil fuel, iirc, near the end.
see also DVD of CBC production “The End of Suburbia” which includes interviews with many of the key players in the peak oil debate, footage from two peak oil conferences, etc. google for the title, can be ordered online.

Posted by: DeAnander | Jan 10 2005 4:06 utc | 18

I just have to chime in and mention that “The End of Suburbia” was not produced by the CBC (Canadian Broadcasting Corporation). It was produced independently by Greg Greene and myself, and funded by my Visa card. No big deal, but I just wanted to set the record straight.

Posted by: Barry | Mar 20 2005 15:34 utc | 19

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