With all the talk that is generated about coal in climate warming debates and so on, it looks as though the world, in part, is now going to find out what it is like to be wirthout coal. As Macquarie Research pointed out Friday, “there have been some truly staggering events in the coal market during the past week that have led to soaring spot prices for thermal coal, coking coal and coke. The world started last week contemplating the potential for a demand meltdown (reflected in plunging equity markets), but in the commodity world, attention refocused on the potential for supply disruptions.

The main events that have changed sentiment have included:

• Major floods in Queensland, Australia that have severely disrupted coal supplies (mainly coking coal for the steel industry, but also thermal coal)

• Severe power shortages in South Africa that have led to enforced cuts in power supply to the coal, mining, ferroalloy and metals industries (reducing supplies)

• Severe coal and power shortages in China that have led to temporary restrictions being placed on Chinese coal exports

Macquarie belives that suppliers may have been prepared to settle Japanese reference contracts for thermal at $90/t fob a week ago (last year’s level was $55/t), but now will seek close to $100/t. Coking coal suppliers are offering $210/t fob (compared with $98/t last year) and may have been targeting $150-170/t a week ago).

These disruptions appear likely to reduce steel production due to the likely chronic shortage of coke and coking coal, and this could keep the upward momentum in steel prices intact. Macquarie reports receiving information that there are acute shortages of steel in the Middle East and that this is likely to get worse. In China and South Africa, base metals and ferroalloy production cuts are also taking place.

The disruptions to iron ore supply from Brazil are keeping iron ore tight, fuelling expectations of 50%+ contract price rises.

All these disruptions are making the short-term outlook for freight rates even weaker, as more ships are being pushed onto the spot market following cargo cancellations.

In Australia, Macarthur coal announced force majeure on deliveries from Copabela and Moorbale (total capacity 5.7 Mt/y of PCI coals) – it may take three weeks to pump the water from the mine; and Wesfarmers announced force majeure on deliveries from its 8.7 Mt/y Curragh coal mine (6.5 Mt/y coking and 2.2 Mt/y steam coal). This week BHP Billiton announced: “The recent extreme weather across the central Queensland coalfields has impacted production from BHP Billiton Mitsubishi Alliance (BMA) operations. While we are continuing to assess the full impact of the weather and achieve a safe resumption of operations, coal processing and the loading of vessels will be delayed. As a result, BMA has advised customers that we have declared force majeure.

In South Africa, Eskom, the state-run electricity provider, cut power to its industrial customers, including major thermal coal mining operations (only the export operations), as well as to various gold and platinum mining operations. In particular, Anglo American announced that power to five of its South African thermal coal mines would be halted indefinitely. Anglo exported ~22 Mt of thermal coal from these mines in 2007. Macquarie’s South African team has reported that it is not yet known how long the current “black-out” will continue, but they believe that the blackout is likely to be the first of many and that any lost production resulting from blackouts will not be recoverable because operations are already running at full capacity. Eskom states that the current power status could persist for up to four weeks. BHP Billiton announced that its coal mines “are continuing to operate and are doing everything they can to ensure coal supply to Eskom.”

The Ministry of Communications directed ports and logistics companies to stop moving export coal immediately to make way for domestic supplies, and it stated on its website: “where there is a need, the loading capacity for export cargoes should be diverted for domestic thermal coal transportation requirements.” The statement added that heads of “irresponsible companies” that do not abide by the latest regulations will be “severely dealt with.”

It has been reported that Qinhuangdao, China’s largest port, turned back vessels that arrived early in the week for loading. Tianjin, China’s second-largest port, stopped all coal exports. However, it may be the case that not all exports will be stopped; apparently, Shenhua is still shipping some coal to Japanese utilities (the major buyer of Chinese steam coals).

The moves come as the government attempts to fill an aggregate electricity supply shortfall (during the past week, there was a shortfall of ~69.6 mkW) that has resulted in sudden power shortages across 13 provincial level power grids in China. The power shortages reflect the fundamental tightness of the Chinese thermal coal market, with demand growing very strongly and supply remaining constrained.

According to the Chinese media, the fault lies with recent heavy snow and rain that fell in most parts of China, seriously hampering coal transport systems and resulting in an increase in electricity consumption in January. Not cited by the media is that coal mining firms appear to believe that they have not been offered sufficient contract-price increases in the negotiations that began in December of last year and that relatively high international coal prices have meant that coal has continued to be exported from China in recent months.

The various issues have left Chinese utilities with extremely low levels of coal stocks; Mcloskey’s reported that the stockpiles of 90 power plants with a total capacity of ~23.7 GW dipped below three days (typical stock levels are 15-20 days). Plants with a total of 70 GW of capacity had inventories dip to less than seven days. The State Grid reported that generator stocks nationwide fell to 17.73 Mt on 20 January, sufficient for just eight days, 10.55 Mt below stocks held at the end of November 2007.

Macquarie notes concern that the move to cap exports is unlikely to be beneficial to the Chinese economy in the long term. “A fall in Chinese steam coal exports in an already tight market will likely result in ex-China steam coal prices (which are already high compared to Chinese domestic prices) remaining strong or even moving higher, establishing the current wedge between non- Chinese and Chinese steam coal prices. In this scenario, China would effectively be using its previous exports internally and most likely paying a higher price for imported coal.

“For the long term, as domestic prices stay relatively low (not encouraging as much production and encouraging overuse), China would become more reliant on the relatively expensive imports, which, in turn, would be more bullish for non-Chinese prices.

“To put some numbers to this, China exported 58.8 Mt (annualised) of thermal and anthracite coal in the 4Q07 and imported 39.5 Mt (annualised) of thermal and anthracite coal during the same period – leaving net thermal and anthracite exports of 19.3 Mt (annualised). If China were to halve its exports of these coals in 2008, it would turn from being a 19.3 Mt net exporter to a 10.1 Mt net importer, which is a major turnaround.