Coal Can't Fill World's Burning Appetite

A labourer takes a nap after searching for usable coal at a cinder dump site in Changzhi, Shanxi province March 5, 2008. China has ruled out increases in state-set gas, power and oil product prices in the near future, despite repeating a long-standing promise to gradually reform the system used to set them, according to key policy papers issued on Wednesday. (Reuters)

Rising coal prices are squeezing Japan and South Korea, which depend largely on imports for energy. Hardest hit, so far, are steel companies. It takes about 1.5 tons of coking coal to make a ton of steel. Steel makers, in turn, are raising prices for carmakers and other manufacturers, who at some point will pass some of the costs on to customers.

Japan's Nippon Steel and JFE Holdings, and South Korea's Posco agreed last month to a 65 percent increase in coal prices, paying Brazilian mining giant Vale $78.90 a ton, up from $47.81. It was the industry's first major deal of the year and could set a global benchmark for material to make steel; a day after the deal was announced, Japanese Industry Minister Akira Amari announced that he was worried about the country's growth.

Japanese steel makers were also buying on the spot market last month, purchasing U.S. coking coal for the first time since 2005, according to Nihon Keizai Shimbun, a Japanese business paper. It reported that mills were paying about $350 a ton for U.S. coal, which is about three times the price of coal purchased from Australia last year.

Nippon Steel has said it plans to raise prices for steel sheet and plate by 10 to 20 percent, reflecting the higher costs of iron ore and coal. Shipbuilders have been passing higher steel costs on to their customers. And in the construction machinery industry, Shin Caterpillar Mitsubishi and Kobelco Construction Machinery raised prices across the board in January, citing higher materials costs.

Jackpot for Mining Firms

For coal mining companies, the coal crisis is a bonanza.

The price hike has revived long-neglected mines in Hokkaido, a region in northern Japan that has been producing coal for more than a century. As global coal prices have more than doubled, the Japanese mines have suddenly become competitive and they are attracting the attention of utilities and companies that use coal for power.

Hokkaido Electric Power Company this year doubled its coal order from the Hokkaido mines, from 500,000 to 1 million tons. The mines cannot produce enough coal to meet new requests.

In the United States, it is getting harder to license and borrow money to build new coal plants. But Peabody Energy's chief executive Gregory H. Boyce says foreign demand will sustain mining output. "Coal is the sustainable fuel best able to close the gap of growing demand vs. scarce and expensive alternatives," he said at a conference last month.

Khani, the FBR analyst, said that "coal use has expanded beyond steam and steel into coal-to-liquids in China and coal-to-chemicals," which he said would link coal prices to oil as well as natural gas. Given recent oil price levels, that could mean higher prices for coal too.

That could slow U.S. and worldwide economic growth and contribute to a renewed bout of stagflation. Rising commodity prices are "producing real limits on the future of economic growth in the U.K. and overseas," said Shaun Chamberlin, a specialist in energy and climate change at the Lean Economy Connection, an research institute in London. "In terms of industry, we're running out of ways of generating energy. We've jumped around from one energy source to another, and now we're running out."

All this is especially bad news for those worried about climate change. Germany, for example, is caught between its pledge to eliminate nuclear power and its pledge to slash carbon emissions. Because nuclear energy accounts for a quarter of the country's electricity needs, utilities have filed applications for permits to build two dozen coal-fired plants over the next few years.

"You reach a point where people say you have to stop burning coal," said Per Nicolai Martens, director of the Institute of Mining Engineering at the Aachen Technical University in Germany. "But when you reach that point, you are forced to ask the question of what happens when you shut it off?"

In the developing world, where growth is paramount, there is no thought of shutting off coal, especially when, on average, a person in China emits about one-sixth and an Indian less than one-tenth as many greenhouse gases as an American "Coal will continue to be king in India. There is no way out," said Kumar, of the Confederation of Indian Industries. "The other choice is asking the country to stay poor. . . . The question is, are we going to allow poverty or allow a little bit of pollution?"

Harden reported from Tokyo. Correspondents Ariana Eunjung Cha in Shanghai, Craig Timberg in Johannesburg, Shannon Smiley in Berlin, Jill Colvin in London and Rama Lakshmi in New Delhi contributed to this report.