Never mind gold - invest in record-breaking coal

published 7 February 2008

Over the last week, the price of coal has soared to a new record.

Thermal coal prices jumped to $116.44 a tonne at Australia's Newcastle port, which is the benchmark coal price for Asia. This represents a staggering rise of $23.09 in just a week. That's a staggering increase of 25%...!

Not only is demand very high, but the supply chain is in trouble. China's chilly winter is playing havoc with transport and electricity shortages mean mine output is being hit. The country has therefore declared that it will not export any coal in February and March

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This has combined with the electricity shortage in South Africa something that I believe will not be sorted anytime soon. Indeed, the South African power group Eskom have already failed to deliver on their promises.

The company said that it would be able to meet 90% of the power needs for miners. However, it said at the end of last week that generating plant breakdowns meant it could supply only 80% of their needs.

It'll take years to sort out

Eskom says shortages are likely to last several years, with rolling blackouts scheduled for next month. These supply disruptions are likely to continue to boost the price of coal, platinum and gold.

Australia also had its own supply problems. A number of Australian producers last month were required to issue a force majeure on immediate coal shipments due to recent heavy rain and floods in Queensland.

I simply cannot see any bearish potential in coal at the moment. There is a bull squeeze going on as supply side disruption and demand growth squeeze prices higher.

On 29 January, JP Morgan took a break from paying Tony Blair's mortgage to upgrade its coal-price forecasts. It upped its 2008 contract prices for power-station coal to $90 a ton, from $70. It boosted forecasts of 2008 contract prices for coal used in steelmaking to $140 a ton from $120.

BHP Billiton has said that coal production at its joint venture with Mitsubishi in northeastern Australia will be reduced for as long as six months due to the flooding. This alliance is the world's largest exporter of coal used in steelmaking. There have also been flooding problems for mines owned by Xstrata and Macarthur Coal.

These circumstances are unique. Indeed, even if the oil falls substantially I do not believe that this will have an effect on the bullish outlook for coal prices. I feel utterly confident that the price is heading just one way.

This article is taken from Garry White's free daily email Garry Writes'