Rising coal prices are set to spike at least 20 per cent higher because of supply shortages due to severe flooding in Australia, adding cost pressures to the steel industry that could ripple widely through the economy.
Some industry watchers believe the effects of the supply squeeze will be felt through this year and into 2012, though analysts and officials in the coal and steel-making business say the toll cannot be precisely quantified yet, with mines in Australia still under water.
Australia supplies about half of the metallurgical coal used in steel making. The severe supply disruption has been a boon for Canadian producers. Shares of three major Canadian coal companies hit all-time highs on Tuesday on the Toronto Stock Exchange, led by Teck which rose 1.7 per cent and has more than doubled in the past half year. Western Coal rose 2.2 per cent and Grande Cache climbed 5 per cent.
Spot prices for metallurgical coal - also known as coking coal - have risen to about $250 (U.S.) a tonne, up from current negotiated contract prices of about $225. Several analysts on Tuesday said the price could reach or surpass $300, the level to which the price spiked in 2008 during the commodity frenzy of that year and similar flooding in Australia.
Three-quarters of the coal fields in the Australian state of Queensland currently cannot operate because of the floods, and rail lines that connect to ports are also under water, state premier Anna Bligh told Australian broadcaster ABC. She said the floods could have a "significant long-term effect" on the global steel business.
"This is an event that will have a ripple effect across Queensland, Australia, and some parts of the international region for many months to come," said Ms. Bligh.
Greg Barnes, an analyst at TD Securities, on Tuesday increased his price prediction for coal this year to $240 from $220. In 2012, Mr. Barnes sees $235 coal, higher than his previous $200 forecast.
"We expect coking coal to remain tight for the next several years," Mr. Barnes said in a report.
Skeptics noted the commodity is particularly volatile, pointing to the recession-exacerbated crash where prices fell to about $140 in mid-2009. Before the 2008 spike, companies such as Teck were selling met coal for barely $100.
Analyst Chris Damas - who is bullish about demand for coal and predicts strong prices for the commodity - doesn't see the flood-related price spike lasting.
"I see the effect being temporary and wouldn't expect this trend to last more than a month," said Mr. Damas of BCMI Research.
For steel makers looking for spot coal, there's not much around. For example, Teck, Canada's top metallurgical coal producer, said only a small fraction - about 10 per cent - of its coal goes into the spot market.
"International trade in seaborne hard coking coal is still largely a contract business," said Greg Waller, Teck's vice-president of investor relations.
Teck has previously said that its highest-quality coal was being sold for $209 in the fourth quarter of 2010.
Steel makers remain optimistic that they can cope with the supply disruption. In China, the world's largest maker of steel, mills had comfortable inventory levels after building up supplies in November and December, according to local raw materials traders cited by Reuters. Reuters also cited an executive at an unnamed Japanese steel maker who noted that mills were able to weather the supply disruption in 2008 without slashing production.