2011 Coal Trends and Q4 Outlook

By James Wellstead – Exclusive to Coal Investing News

Coal markets have witnessed an eventful 2011 thus far. Various natural disasters, coupled with continued demand growth from emerging markets, have continued to support prices of both thermal and metallurgical coal  markets, and have lead to a number of takeovers.  However, leading into the final quarter of 2011, expect sliding thermal and coking prices in line with softening demand.

2011 Coal Trends

2011 began on a low note as the worst flooding in the Australian province of Queensland in 50 years pushed coking coal prices to record highs, increasing by ten percent in the month of January alone as coal majors BHP Billiton (NYSE:BHP), Xstrata Plc (LON:XTA) and Rio Tinto Group (NYSE:RIO) lost AUS $2.1 billion in sales in the first three weeks of the year. Thermal coal prices out of the Australian Newcastle port, a benchmark for Asia, also hit a high water mark around US $140/metric ton mark in early January, the highest level since September 2008, with the flooded region losing US $473 million in exports a week in January.

The tragic events of the Japanese earthquake, tsunami and nuclear meltdown brought thermal prices down as a large portion of Japanese electricity grid capacity – the world’s number one thermal coal importer – was destroyed, leaving expectations of significantly reduced demand.  However, the price relief was short lived in both thermal and coking coal prices. Increasing thermal demand leading into the northern hemisphere’s summer months, as well as a quicker than expected Japanese recovery provided demand support for thermal prices. Coking coal contracts, which traded around the US $200/mt mark in Q1 of 2011, continued their upward trend toward the US $300 range as the Australian floods and logistical bottlenecks reduced supply.

The continued strong prices for coking and thermal coal also saw numerous large-scale producers and traders in merger and acquisition mode. Consolidation occurred heavily within the American market, started by Alpha Natural Resources (NYSE:ANR) acquisition of Massey Energy Corp and followed by Arch Coal’s (NYSE:ACI) takeover of International Coal Group in May. Moves were continued later into the summer as Glencore International Plc made a bid to acquire South African coal miner Optimum Coal for approximately US $1.2 billion and Peabody Energy (NYSE:BTU) and ArcelorMittal (NYSE:MT) confirmed their successful bid for Australian miner Macarthur Coal (ASX:MCC). These movements have been part of a larger transition taking place within the coal industry, which could carry large impacts if they continue as expected.

But despite the natural disasters and a number of note worthy political developments related to nuclear and environmental policies, international coal markets have remained very strong so far in 2011. Going forward, however, environmental and energy policy dynamics in  developed countries could carry lasting impacts on the industry. In particular, Australia’s efforts to implement a country-wide carbon tax bill would see big polluters – like steel and coal producers – paying AUS $23/mt of greenhouse gas (GHG) emission starting in mid-2012. The result would impact one of the world’s most productive coking and thermal coal, and  highest GHG emitting, regions. These political economic developments are not reserved for developed economy markets, however, as China announced plans for a pilot carbon trading project which would eventually develop into a carbon market in the following years.

Looking ahead to the short-term, expect environmental policy developments to be less instructive of coal markets as Q4 dynamics and the strength of global economic markets to play a more decisive role.

Looking Ahead – Q4

Despite pessimistic outlooks for the global economy, many coal producers expect continued growth in the near-term for thermal and coking coal markets. After concerns over contracting economic growth in US and EU regions pummeled commodity stocks and prices in mid-July, a subdued sense of confidence has returned over longer-term growth prospects in primarily emerging economies. Yet, the potential for corrections continue as a number of dynamics push coal prices around despite longer term demand and supply growth.

Coking Coal

In particular, receding industrial demand from a number of regions, including the booming Asian markets, is expected to see hard coal coking (HCC) prices fall. While much of the growth contraction is projected for developed markets, Credit Suisse analysts believe that due to weaker steel prices in China and India will lead to a coking coal price US $20-30/ton to the $250-265/ton range.

“We had expected HCC prices to fall back to the Chinese domestic prices by now. However substantial amounts of Queensland port and rail maintenance across July and August have led to a slower-than-expected recovery in volumes,” Credit Suisse said. The bank placed this analysis on the recovery of loading rates out of Queensland state in Australia, the biggest global supplier, which are hastening recovery from flooding.

Spot prices should also follow the downward trend, said Colin Hamilton at Macquarie Commodities Research. And semi-soft coking coal contracts, Credit Suisse also noted, may fall to $191/mt in Q4 from $212/mt in Q3.

Thermal Coal

Chinese thermal prices – a key price benchmark – are expected to recede as well, with the hot summer months winding down and stockpiles are beginning to be delivered to ports and power stations. Further, monetary tightening in China has also provided an environment that is no longer able to support higher thermal prices from more costly Australian producers, as Chinese have shifted some contracts to South African producers.

Thermal contract bids were pegged in the area of US $113-114/mt on 5,500 kcal/kg and US $116/mt for 6,000 kcal/kg NAR thermal coal from Richards Bay out of South Africa in late July. However, more recent bids by Moroccan generator Jorf Lasfar Energy Co (JLEC) were quoted in the region of US $124/mt for a 120,000 mt shipment of 5,800 kcal/kg thermal in October and November.

With all these sliding price targets, concerns have been raised over a potential peak within coal markets and commodities more broadly. Despite these potentially valid considerations, coal is a growing component of the international economy, and looks poised to be for some time. After thermal coal hit 40 year highs as it made up 29.6 percent of the world energy basket in 2010, continued growth looks likely to remain resistant to any remarkable  falling off of demand forecasts.

 

Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.