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Crumbling coal demand signals slowing Asian economy

A bulldozer dumps coal at the Brooks Run Mining Co., owned by Alpha Natural Resources, in Cucumber, W.V.

Jon C. Hancock/Bloomberg

Demand for coal, a key ingredient in steel-making, is faltering, a worrisome sign that industrial activity in Asia - a major driver of global growth - has weakened.

The shift has caught coal producers by surprise. Alpha Natural Resources Inc., a major producer based in Virginia, slashed its planned 2011 shipments of coal for steel making by as much as 12 per cent on Wednesday, citing in part "unexpectedly curtailed" business from Asian customers.

Weaker sales in the coal and steel sectors comes as demand for other important metals, such as copper, is also sliding lower. The price of copper, which is considered a strong indicator of global economic activity, is down more than 10 per cent from August and has fallen steadily lower this month. Steel and its inputs, including metallurgical coal, are also viewed as important bellwethers of growth, particularly for emerging markets like China that are industrializing quickly and heavily influence world prices of steel.

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Jittery investors dumped coal stocks on Wednesday. Alpha Natural shares crashed 17 per cent. Vancouver-based Teck Resources Ltd. - which produces about the same amount of metallurgical coal as Alpha Natural - fell 5.8 per cent to its lowest level since August, 2010. The shares are down about 22 per cent this month.

One of the world's largest miners, Rio Tinto PLC, compounded the worry on Wednesday. The company says it still has a full order book, but this week said cautious customers have delayed delivery on some orders. In a presentation to investors on Tuesday, it touted its strong balance sheet and a cash position that will allow it to "withstand any near-term decline."

"It is noticeable that markets are somewhat weaker than they were six months ago," Rio Tinto chief executive officer Tom Albanese told investors on Tuesday.

The volley of negative news muddies the prospects for coal and steel demand through the rest of this year, said analyst Meredith Bandy at BMO Nesbitt Burns. "The question is, how widespread is this?," she said.

The strong market reaction is indicative of how nervous investors are right now, analysts said. Ms. Bandy pointed out that the weak demand for Alpha Natural coal was particular to India, rather than Asia as a whole or China in particular.

Another coal company, Walter Energy Inc. , said on Tuesday that its output of metallurgical coal in the second half of 2011 would be lower than expected, due to issues at its operations, although some investors took that as another sign of weak demand.

John Hughes, an analyst at Desjardins Securities, said all the negative sentiment "underlines the fear factor" in the market because of the global economic outlook. He said Alpha Natural's use of "unexpectedly" rattled investors, even though it appears the company's problems first appeared in the summer.

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Demand in China may be less robust, possibly because of the country's efforts to tame its economy and cap inflation. On Wednesday, consultancy Asian Metal Ltd. cited that prices for steel in China were falling as demand among domestic customers in the country slips. "Insiders deem that the price will further go down," Asian Metal said in a report.

Morgan Stanley on Wednesday said a series of negative factors led it to take a "cautious" stance on coal. It said a surplus of metallurgical coal looms in 2012 as demand wavers and prices for the commodity could fall lower than some investors believe. Analyst Wes Sconce of Morgan Stanley is worried.

"We think the next move is lower," Mr. Sconce wrote in a report to clients.

The spectre of weaker demand doesn't yet appear to have cut in to the large metallurgical coal business in British Columbia. Teck, the main producer, was hampered by bad weather and labour problems earlier this year but has said the year will end with strongly, as sales in the October-December period will exceed those of July-September.

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