Benchmark U.S. coals soared past $120 a ton on Wednesday, as Midwest flooding piled atop world supply-demand fundamentals to drive prices up.
Big Sandy barge coal topped $123 a short ton on the New York Mercantile Exchange. Central Appalachian rail coal on CSX railroad (CSX.N: Quote, Profile, Research) touched $144, market sources said.
"The flooding is certainly tightening things up," a Wall Street analyst said. "But I believe much of the move past $100 has to do with ongoing global fundamentals."
Jim Thompson, managing editor of Coal & Energy Price Report, agreed, and added two factors: the nearness of July maintenance season for the CSX and vacation time for miners.
Vacation season for mines is an industry tradition, and CSX shuts down coal routes during that time to get maintenance out of the way while minimizing market impact, Thompson said.
So far, floods on the upper Mississippi River have impacted mainly Powder River Basin coal deliveries, some of which cross the river by rail headed East, market sources said.
Some Illinois Basin and Appalachian coal deliveries also could be affected as the flood crest moves downstream, experts have said.
Segments of the rail lines near the river are underwater, and coal barges on the upper river have been stranded by closure of locks that raise and lower them, traders said. (Reporting by Bruce Nichols; Editing by Christian Wiessner)
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BANGALORE, June 17 (Reuters) - Surface and underground mining equipment makers in the United States are riding high on surging global demand for coal, raising hopes that the upswing in this industry is here to stay for a while.
Coal demand has been steadily increasing with rapid industrialization in China and India and new coal-fired power plants coming online in Britain, Europe and the United States.
Two of the largest U.S. mining equipment makers -- Joy Global Inc (JOYG.O: Quote, Profile, Research) and Bucyrus International Inc (BUCY.O: Quote, Profile, Research) -- have been posting solid sales for the last few quarters, with miners striving to meet demand.
Joy Global and Bucyrus are the only U.S.-based companies that specialize in making giant shovels, drills and draglines used to extract coal, copper, iron ore, oil sands and other minerals.
Industrial machinery giants Caterpillar (CAT.N: Quote, Profile, Research) and Terex (TEX.N: Quote, Profile, Research) also have units that make mining-support equipment such as trucks and loaders, but not specialized excavators.
"If the demand for coal is up, if coal companies are making money, they are going to be spending more on equipment," Sterne, Agee & Leach analyst Ben Elias said.
The gap between coal demand and supply could reach 60 million to 100 million tons this year, Joy Global said in May.
Some U.S. coal officials see a shortage of 25 million to 35 million tons this year in the 6-billion-ton world market and a shortfall of perhaps 70 million tons next year.
The supply-demand gap has been exacerbated by an export ban that China imposed after it was hit by the worst snowstorms in 50 years in January, pushing prices up.
Joy Global has forecast a supply deficit in mineral markets for the next three to five years or longer.
Coal mining accounts for about 80 percent of the revenue of Joy Global and Bucyrus, whose customers include mining giants such as Australia's BHP Billiton (BHP.AX: Quote, Profile, Research) (BLT.L: Quote, Profile, Research), Brazil's Vale (VALE5.SA: Quote, Profile, Research)(RIO.N: Quote, Profile, Research) and Britain's Rio Tinto Ltd/PLc (RIO.L: Quote, Profile, Research).
Shares of both companies have almost doubled since the fourth quarter of 2007, roughly when coal prices started shooting up in the United States, and both are trading near their lifetime highs.
The broader Dow Jones U.S. industrial engineering index .DJUSIQ has remained largely flat during the period.
THE CHINA CONNECTION
Briggs-Ficks Securities analyst John Collopy said the biggest increase in volume for both companies is coming from developing markets.
"Whether it is China, India or Russia, there is a big demand for equipment," he said.
In April, Bucyrus entered into a joint venture with China's Huainan Mining Industry (Group) Co Ltd to set up a manufacturing facility in the Huainan mining area.
"Foreign markets are incrementally the big ticker for these companies," Collopy said. "The more aggressive growth is going to be offshore in the foreseeable future."
Last quarter, Joy Global's sales rose 34 percent to $843 million, with almost half coming from the international market. New orders for the period jumped almost 70 percent to $1.2 billion.
Sales at Bucyrus more than doubled to $517 million, with orders rising to $1.09 billion. The current-year figures reflect the company's acquisition of Germany's DBT GmbH for $710 million in cash last year.
"If the orders and backlog continue to grow over the next several quarters, the two stocks will continue to perform decently," Briggs-Ficks' Collopy said.
APPALACHIAN BOOM
Interest in U.S. coal, previously deemed too expensive, has also heightened, especially coal from the Appalachian Mountains in the eastern United States.
Appalachian coal output, which accounts for more than a third of U.S. production, had remained soft till last year as it is harder to tap into.
"High Appalachian coal prices made investment in underground mining equipment attractive," analyst Paul Bodnar of Longbow Research said in a note last month.
Underground mining accounted for about half of total revenue for both Joy Global and Bucyrus.
Bucyrus entered the underground mining equipment market through last year's acquisition of DBT.
PRICE SAFEGUARDS
These companies are relatively immune to rising raw material costs as they have price escalators built into their contracts, so they are able to pass on higher prices to customers.
However, analysts said the companies should be judicious in capacity expansion, as strong order growth often leads to over-investment and excess capacity addition.
Even miners in the United States are cautious in their expansion plans, fearing a boom-bust cycle, declining reserves and tightening regulation.
"Mining equipment making is still a cycle," Longbow's Bodnar said. "There still will be a downturn and you want to make sure that you expand rationally."
Bodnar said both companies are in pretty good shape from a capacity standpoint.
A pullback in commodity prices, a U.S. cap on carbon emissions or lumpier-than-expected order activity could trigger a pullback in their share prices.
"If the prices of commodities begin to soften, that would probably take some of the fluff out of the stocks at that moment," Briggs-Ficks' Collopy said. (Editing by Saumyadeb Chakrabarty, Anil D'Silva)
