Rio expects strong coal prices to 2011

By Jackie Cowhig

LONDON (Reuters) - Global miner Rio Tinto (RIO.L: Quote, Profile, Research, Stock Buzz)(RIO.AX: Quote, Profile, Research, Stock Buzz) expects long-term coal supply contract prices to remain strong in 2009-2011 because lack of infrastructure will restrain supply growth for another few years, energy division chief executive officer Preston Chiaro said on Tuesday.

"The extremely high prices we've seen recently for both thermal coal and coking coal have been driven by the supply/demand imbalance. Coal supply/demand tightness won't ease for many years due to limited infrastructure and strong demand," he told the Reuters Global Mining Summit.

Chinese demand for coking coal and steam coal will also help keep prices high, he said. "Can infrastructure expand faster than Chinese demand can grow? That's the $65,000 question and nobody can answer it yet."

China's production and demand has been growing at around 12-13 pct a year. China's coal production last year was around 2.7 billion tonnes, about half of the world's coal output, he said, but its demand is keeping pace.

Rio has latent coal production capacity in Australia in New South Wales and Queensland which the company cannot bring on because of a lack of rail and port space, he said.

ABBOTTS POINT DEAL

Rio on Monday signed a 10-year take-or-pay contract for 16 million tonnes a year export capacity at Abbotts Point port in Queensland, he said.

Output from Rio's Blair Atholl mine and Claremont projected mine will be exported from Abbotts Point.

Abbotts Point is one of the several Australian coal ports which are undergoing expansions to be complete in around 2010.

Chiaro would not comment on reports that Rio is asking $135.00 a tonne free-on-board for thermal coal 2008/2009 to Japan, up from $55.65 last year.

"We've heard the same reports," he said, smiling. "I can say that spot prices are extremely high -- well in excess of $100.00 a tonne FOB for thermal and we've heard coking coal sold recently into Asia at $330.00 a tonne CIF."

Infrastructure constraints will keep prices strong but the recent surge in prices was also due to severe weather in Australia which cut at least 7 million tonnes from this year's exports, he said.

"We declared force majeure due to floods but all of our mines in Queensland are up and running now," he said. Water is still being pumped out of the Hail Creek coking coal mine but the secondary pit is being mined, he said.

There has been one benefit from the floods, he said. Rio has used all of its port and rail allocation and has also used some allocation which its competitors were unable to use, to sell some spot coal.

Rio is still negotiating 2008/2009 term supply contracts with its customers in Japan, Korea and Taiwan, he said.  Continued...