September 28, 2007 / 1:19 PM / 12 years ago

ANALYSIS-Record coal prices hammer power generators

LONDON, Sept 28 (Reuters) - Record high coal prices and tight supply are piling the pressure on electricity generators already hit by soaring oil markets and high gas prices, industry players say.

Coal fuels about 40 pct of global power generation. Physical coal prices for delivery into Europe have risen by over 50 percent this year.

High freight rates are tightening the screws on prices and utilities and cement producers, also big coal users, may be forced to scale down operations.

“The market is having to adapt to coal prices, to freights, which we’ve never seen before,” a trader said.

“I do believe that before the end of the year it’s possible that some generators in Asia will have to look at turning off their plants because they won’t have enough coal,” said a coal producer.

Physical coal prices on Thursday surged to a record $102.00 a tonne delivered into Europe, from $65.00 in the first quarter, because rampant demand in Asia has sucked in millions of tonnes originally destined for the Atlantic market.

Power generators, Europe’s biggest coal consumers by far, buy most of their coal on rolling long-term contracts from producers but usually purchase a small proportion from the spot market.

Coal-fired generation is used most heavily during the winter months when it is usually the lowest-cost fuel.

Some European regions can switch from coal to hydro, wind or gas-fired, notably Scandinavia, Germany and Iberia, but most European utilities rely on at least some coal-fired generation.

Germany’s E.ON AG EONG.DE, Italy’s Enel (ENEI.MI) and Spain’s Endesa (ELE.MC) are among the utilities currently seeking coal for Q4 and Q1, market sources said.

One European utility recently paid close to $115.00 a tonne CIF for a South African cargo which it bought to replace delayed shipments of other origins.

European cement companies said they also recently bought at prices far higher than those indicated on the globalCOAL trading platform or by published weekly coal indices.

“So many utilities and cement companies are looking,” a trader said. “They will pay but they are desperate that nobody finds out.”

CONSUMERS PAY UP

A large European industrial consumer of coal said his company had struggled recently to find enough coal of any acceptable origin and had no choice but to pay the price asked by the supplier.

“In Europe anyway, I think you will be able to find enough coal, but it won’t be easy and you’ll have to pay up,” a further trader said.

Consumers everywhere have had to adjust to paying prices higher than anybody imagined were ever achievable. Record freight rates have boosted delivered prices but free-on-board coal prices at origin have also hit records this year for Australian, Russian and Indonesian coal.

“What everybody wants to know is when freights are going to fall, if they’re going to fall or if we’re just going to have to live with it,” a major Indian trader said.

The acceptance of soaring prices by Indian end-users took many traders and producers by surprise.

“We used to say India was totally a price-driven market and nobody would buy South African coal for more than $50 FOB but the consumers have had no choice this year,” the Indian trader said.

“I think they will be paying $120 a tonne CIF by the end of the year — they’ll have to or have no coal,” he added.

South African spot FOB prices are often taken as a good indicator of the cost of coal because its quality is acceptable to most consumers.

Spot South African FOB prices are at about $65.00, having stayed at around $60.00 for most of the year but are expected by suppliers and consumers to reach $70.00 within weeks.

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