Coal still hot: Macquarie
By Staff reporter, 14 July 2008
MIRROR, mirror on the wall, where is the best value pure resources play of all? While some point investors immediately towards iron ore, copper or oil, the equities research team at Macquarie Bank say look no further than the much maligned ugly sisters, coking and thermal coal.
According to Macquarie Research, this year’s massive price rises for metallurgical coals, which follow two years of price declines (and with some suppliers of hard coking coal still holding out for $US350/t fob plus and semi-soft suppliers wanting $US250–260/t fob), could be just the start of a period of solid gains for met coal producers.
“We foresee coal prices soaring in 2009 with ongoing structural shortages for a number of years driven by large and growing Chinese and Indian demand and delays in the completion of coal mine expansions in the current and future major coal exporting countries,” Macquarie said.
“There are now signs that Chinese steel mills will be facing desperate shortages of met coal in the coming years and look set to meet previous expectations of strong import growth. However, the delays in new capacity combined with the disastrous floods in Queensland earlier this year – which look set to cost around 10 million tonnes of lost supply in 2008 – appear to have created a structural shortage of met coal, which could now last for several years.”
Macquarie said the recent thermal coal settlement of “only” a $US125/t rise reflected an “extremely tight market at the time”.
“But in early July spot Newcastle prices touched an incredible $US200/t fob, driven by heavy speculative buying. There has been some pullback from these levels but the general rise in prices is a true reflection of fundamentals in our view and should be translated into a rise for the Japanese reference prices to around $US180/t fob in 2009.”
Macquarie said the met coal price outlook was improving for both the short and medium term, with “upside potential to our forecasts remaining, especially in 2010–12 if demand from China and India prove to be stronger than our current assumptions and if supply growth continues to lag”.
“In thermal coal, China remains a key unknown and potentially could lead to a much larger price rise in this product going forward. Another destabilising factor in the thermal market is that semi-soft prices are likely to be concluded at close to $US240/t fob, or above, $115/t higher than thermal. Given that many Australian thermal coal suppliers have some flexibility to switch sales from thermal to semi-soft or soft coking coals, this could create a shortage of thermal later in 2008.”
Also important in driving prices higher was strong Indian and Japanese demand for thermal coal, coupled with the move of China from being a significant net exporter to “balanced” in 2007. In coking coal, there was an unexpectedly large surge in Eastern European demand for hard coking coal, following serious mine accidents in Russia and the Ukraine. Macquarie said significant additions to steelmaking capacity in India and Brazil in the coming years could also significantly boost demand and keep the coking coal market tight.
“So far, China has been a minor force in the international coking coal import market, but soaring domestic Chinese prices imply this may soon change,” it said.
The bank said growth in Australian thermal coal exports stalled in 2007 and it was raising its long-term prices for the commodity to reflect the fact that it didn’t believe delays in the debottlenecking of Australian supply would be overcome any time soon. While some port expansions might be completed this year, matching increases in rail capacity could be 1-2 years away, it said.
“In hard coking coal, the loss of Australian tonnage to the market in 2008 created panic that has been partly relieved by a sharp rise in US exports; it is still possible, however, that steel production will have to be cut in some countries due to an absolute shortage of coal,” Macquarie said. “The real threat to the coking coal market in the short to medium term, however, is the growing tightness of supply of coke and coking coal on the domestic Chinese market. If China stops exporting coke - currently 14Mtpa – or starts importing coking coal in a big way, this could lead to another leg up in prices from 2009 onwards.”
One note of caution for those actually building new coal production capacity was that Macquarie has also made significant adjustments to its steel pricing outlook for the next three years to reflect the expected tight supply/demand equation and the effect of higher raw material prices.
However, the bank somewhat surprisingly has lowered its oil price expectations for 2009. “While our oil colleagues have upgraded their oil price forecasts, we foresee average prices of just above $US100/barrel in 2009 and this should be sufficient to avert a serious developed and developing country slowdown,” it said.
Macquarie expects Centennial Coal, Felix Resources and Straits Resources to outperform the market “based on fundamental value”.
Also in the July 14 - 20, 2008 edition
- AFRICA
- Anvil strengthened by Gertler support
- COVER STORY
- Lust, caution
- EXPLORATION
- Deep test of Charters theory
- FINANCE
- Bear market will sort wheat from chaff
- Demand, prices point to rich Mosaic
- Friedland talking copper and gold: is he barking or what?
- Lihir could take heat out of majors' costs
- Selling services still easy, on the one hand
- Trinity brings New Gold to market
- GOLD BUG
- Barking dogs really bug me
- INTERCEPTS
- What's that, Mr Smith?
- MEDITERRANEAN'S GHOST
- Just passing go can lead to untimely end
- MINING
- Exco plan takes shape
- ReGENERATION
- 60 seconds with Garry Frere
- Bugs, bucks and disbelief
- SOUTH AMERICA
- Pacific Rim scales back as anti-mining campaign grows
- UnCUT
- Glengarry, Western Areas, nickel positives, uranium simmers, Boart, Kev
- VIEW FROM THE WEST END
- Cruel twist in this crying game
- WOMEN IN MINING
- Path starts at Forrest