A cautious optimism for coal – by David Ebner and Brenda Bouw (Globe and Mail – January 4, 2012)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

RIDLEY ISLAND, B.C. AND VANCOUVER – The sky is a hard grey and the small mountains of coal piled a dozen metres high are thick black. From this outpost in northwestern British Columbia, about 700 kilometres from Vancouver, coal trundles on conveyors from train cars to the piles, and then onward to docked ships destined for steel mills in China, Japan, and South Korea.

New equipment – huge rings of steel – lays nearby. The gear will increase the capacity of Ridley Terminals Inc. to unload coal from trains, one step in a four-year, multimillion-dollar effort to double exports to 24-million tonnes a year, and handle new and increased production from coal mines in British Columbia, Alberta and the United States.

It is the second time Canada has bet big on higher coal exports to steel makers in Asia. Last time, the bet on Japan failed badly when the forecasted prolonged boom didn’t last. Today, the same belief, and certainty, has been attached to China, the world’s largest steel-producing nation.

China is the key customer of metallurgical coal, a vital ingredient in the making of steel used across all industries. However, demand has ebbed as China experiences a marked economic slowdown in recent months following decades of double-digit annual growth. Tightening credit has caused China’s property market to slow and its steel mills are curbing production on squeezed margins.

The mounting debt crisis across Europe and the U.S. has also fuelled concerns of a double-dip global recession, which in turn has caused the price of coal and other commodities to fall from records reached last year. Iron ore, used alongside coal to produce steel, has also seen its price fall sharply as Asian steel makers report paying lower prices for the two commodities.

“The global economy has yet to find any sort of stability and this uncertainty has carried over into steel demand,” said HSBC Securities’ Richard Hart in a recent note. “The majority of global steel mills are operating at substandard utilization rates.”

Executives at major coal and iron ore producers such as BHP Billiton Ltd. and Rio Tinto PLC have also acknowledged some Chinese buyers have had credit difficulties. While many miners can’t deny the economic picture right now is grim, most insist any lasting slowdown will be nothing like the collapse seen during the 2008-09 global financial crisis. They point to orders that are still being filled, and a steady demand for commodities even if the volume has dropped from previous highs.

The continuing construction at Ridley also helps to allay concerns about a commodities crash, as producers such as Canada’s Teck Resources Ltd. (TCK.B-T37.90-0.47-1.22%) and London-based Anglo American’s Peace River Coal operations in B.C., among others, pin their growth on the planned expansion.

Ridley, a federally controlled Crown corporation, was granted the power by Ottawa last spring to borrow from capital markets to fund the $90-million expansion, which is part of a larger $300-million port expansion to further increase capacity to ship commodities such as coal to Asian markets.

For the rest of this article, please go to the Globe and Mail website: http://www.theglobeandmail.com/globe-investor/investment-ideas/features/2012-market-outlook/a-cautious-optimism-for-coal/article2290506/

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