Coal Market Leaps To Life

By Kishori Krishnan Exclusive To Coal Investing News

Extreme volatility is a good thing. It attracts more interest than it discourages. Take the case of coal – huge swings in price have brought on much needed attention.

Coal prices did nothing for six months, making it an unattractive market but with institutional money coming in heavily mid-month, the dust appears to have been wiped off.

Freezing temperatures in the Northern Hemisphere have also helped keep things warm for coal. The resultant bottlenecks ensured that China was forced to source coal from Columbia and the US.

All of which helped firm up prices.

Trades on

Even as some miners are getting out of coal, like Macarthur Coal, which has abandoned its controversial plan to buy Donaldson Coal from the Noble Group after it failed to reach a binding agreement with the Hong Kong trading house, and mining giant BHP Billiton which is planning to sell up a stake worth up to 25 per cent in its Maruwai coal project in Indonesia, others are buying in, optimistic about the road ahead.

Despite a 69 per cent decline in fourth-quarter earnings from the mesmerizing profitability of the prior-year period, Peabody Energy (NYSE: BTU) remains supremely positioned to keep long-term investors moving through the uncertainty and upheaval of a shifting marketplace for coal.

Coal company Peabody, which is expanding a mine in Australia to meet growing demand for metallurgical coal used by steel companies, said expansion of the Metropolitan Mine in New South Wales would increase capacity by 1 million tons within several years.

Capital investments are expected to total $70 million, including $15 million for this year.

For the year, the coal major enjoyed a 37 per cent increase in Australian coal shipments during the second half of 2009, as compared to the first half. Overall Australian exports reached a record annual mark of 277 million tons.

Peabody anticipates a further 8 per cent growth rate in seaborne Pacific coal markets for 2010.

And to top it all, Peabody CEO Gregory Boyce has confirmed, “China and India have permanently changed the seaborne metallurgical and thermal coal market landscape.”

China and India form the heart of that expanding demand. China and India’s consumption of metallurgical coal is lighting a fire under worldwide prices, according to the latest earnings statement from global majors.

Although India’s imports of thermal coal rose 60 per cent in 2009 to 57 million tons, stockpiles remain low, while demand is set to expand further still.

The 72 gigawatts of new coal generation coming online worldwide in 2010 corresponds to a further 300 million tons of annual thermal coal demand, and India is leading the charge with 55 gigawatts currently under construction.

China, despite its vast hoard of coal resources, shifted to a net importer in 2009 to the tune of 70 million tons of thermal coal.

The country’s imports of coking coal, particularly from Australia, has resulted in a spurt in coking coal prices in recent times.

There are also several coal industry mergers nearing completion in China.

Want out

As for companies bailing out, Macarthur said it had reached a definitive deal with Noble to buy Gloucester Coal, a Hunter Valley producer, after announcing the plan last month. But the parties have ditched the most contentious aspect of the $1.2 billion transactions announced last month between Noble and Macarthur – the purchase of the Donaldson Coal business.

Donaldson, of which Macarthur was planning to buy 79 per cent, was unpopular with some shareholders because of the age of its mines.

In morning trade in Australia, Macarthur shares fell 3.4 per cent to $9.91, while Gloucester shares rose 0.3 per cent to $8.55.

As for BHP’s plan to sell a 25 per cent stake, in the Maruwai coal mine in Indonesia, suitors have lined up.

The mine will start production at the end of 2010 and output is expected to reach 40 million metric tons in the next 10 to 15 years.

As reported in The Australian, Merrill Lynch analysts have said BHP could lose about $2.6 billion per year from 2012-16, representing about a 16 per cent drop in full-year earnings.

“We want to keep a majority stake in the Maruwai coal project. So we are looking at selling a 20 to 25% stake,” said Indra Diannanjaya, president director of PT Juloi Coal, one of the seven miners involved in the project.

“But if a business deal fails to take place, BHP would retain 100 per cent. We are financially capable of developing the project,” he said.

The project will need between US$ 500 million and US$ 1 billion.