KARACHI – Disruption in coal supplies is plausible as the geo-political situation, emerging in Middle East and North Africa, is likely to trigger a rise in crude oil prices. With reference to Pakistan, import of coal – chiefly from Indonesia – may have an adverse impact on production cost, given the latter’s electricity generation need, said Gulshan D Ferozepurwalla at SCS trade.
He pointed out that political instability dominates oil markets in Middle East and North Africa, while new or renewed concerns regarding the geo-political uncertainty in countries like Bahrain and Libya can shoot crude oil prices. The Indonesian Coal Price Index (ICI), for Jan, 2011, stood at $112.4 per tonne, increasing to $122.43 per tonne in February, 2011 – with a further 3.6 percent increase in March to $127.05 per tonne.
However, local cement players including LUCK and Attock Cement Pakistan Limited (ACPL) would be able to fend off global coal price hike through improved cost controls, as the continuous rise in oil prices does not conclude that coal prices would also follow a similar path. Coal prices, historically, have been more stable than oil prices.
Evolving a correlation between the two is difficult as coal prices, based on the above analysis, tend to follow the oil prices trend in certain instances; however, a different trend is observed in other instances. Coal traders normally adjust prices with respect to oil, as oil price fluctuation is one of the best indicators of investor attitude towards energy. This adjustment is very quick as an instant hike in oil price spurs a rise in coal.
However, absence of a fundamental increase in coal demand does not push coal price up, in case of a rise in oil prices. Middle East and North Africa are perfect examples where political instability, which dominates oil markets, could not propel a stable rise in coal prices, which have hovered at just below $78 per tonne at NYMEX, since February 10, 2011.
A similar negative correlation is observed with regards to floods in Queensland, Australia, which disrupted the world’s largest supply of thermal coal – sending prices sky high. Nevertheless, a nominal impact on price of crude oil was seen. Moreover, China and India are major consumers of energy-producing coal and are responsible for major increases in coal prices – independent of crude oil, said Gulshan Ferozepurwalla.
He maintained that inconsistent demand, for coal imports, from China is another factor that can cause major movements, both positive and negative in global coal prices irrespective of oil prices. Yet, besides the above discussed negative correlation, there has also been a positive correlation between coal and oil prices.
Disrupted coal supplies likely amid Middle East unrest
