The coal crisis continues, with many countries suffering power outages due to coal supply problems. Macquarie Research says “the strong surge in spot coal prices in recent months, both for coking and thermal, has made forecasting contract price outcomes virtually impossible. We have known for some time that our previous forecasts were way too low, but delayed changing them until a bit more clarity on the implications of recent supply disruptions emerged. Although the uncertainties remain, we decided that we could wait no longer. We have changed our price forecasts for the next three years and left further out prices unchanged. Recent developments affect not only the current year, but also the outlook for several years, in our view.”

For instance, Macquarie is now looking at ($/t fob):

Hard Coking Coal            New     Previous Change

2008 225.0    150.0        50%

2009 180.0    140.0        29%

2010 150.0    130.0        15%

Semi-Soft Coking Coal

2008 135.0    100.0        35%

2009 135.0    100.0        35%

2010 110.0      90.0        22%

ULV PCI Coal

2008 150.0    110.0       36%

2009 150.0    110.0       36%

2010 125.0    100.0       25%

Thermal Coal

2008 125.0      88.0      42%

2009 125.0      88.0      42%

2010 100.0      80.0      25%

Macquarie notes three main events that have thrown the seaborne coal markets into turmoil in 2008 In Australia, major floods in Queensland and heavy rains in New South Wales in January and February have created major disruptions to supply, “with severe losses to planned 2008 thermal and coking coal supplies. Even now, almost a month after the initial problems, there is no clear idea of the extent of losses, but in coking coal they are severe.”

In South Africa a major domestic power shortage has been revealed, “and it is likely that coal previously destined for exports may be diverted to the domestic market on a semi-permanent basis.” And in China, “severe coal shortages emerged following unprecedented winter storms, leading to a temporary ban being placed on coal exports and also to major thermal and coking coal shortages.”

Although final numbers are still unclear, Macquarie has reduced its previous projections of these countries’ thermal coal exports by 20 Mt and their exports of coking coal (Australia) by 10 Mt. “Given the tight nature of the thermal and coking coal markets prior to these problems, this tonnage withdrawal has created impossibly tight markets, with the prospect of power stations and steel plants having to cut their use of coal. Coking coal is in chronic short supply, and we believe that some steelmakers will have to cut production in the coming months.

“The recent problems in South Africa, China and Australia have implications for the supply growth in these areas in 2009 and 2010 (exports will be lower), so this has medium-term price implications. Our recent surveys indicate that Chinese and Indian import demand growth is also potentially higher than previously expected.”

“In the steel industry, the effect has been more than on the internationally traded markets as Chinese thermal coal shortages led to the prioritisation of thermal coal production and shipments at the expense of coking. There has subsequently emerged a chronic coking coal and coke shortage in China, which appears to be reducing steel production in that country.

“The reality of steel production cuts and the prospect of more have contributed to soaring steel prices globally in recent months. The 65% rise in iron ore benchmark prices negotiated by Brazilian producer Vale last week and the prospect of 100% plus coal price rises have led to another round of announcements of steel price rises in recent days, and we expect further strong steel-price rises in the coming months.”