Coal Slides, But Long-Term Remains Bright

- May 25th, 2012

Thermal coal prices have dipped to recent lows and coking coal prices may soon follow. But despite quick sell-offs of coal equities, the long-term commitment to coal remains strong.

Coal Slides, But Long-Term Remains Bright

Softening macroeconomic fundamentals have brought both coking and thermal prices lower in recent weeks, with excess stock beginning to delay shipments.

Chinese iron ore and coking coal buyers have reduced domestic steel production and have indicated that they may forestall imported cargoes. Platts reported one Beijing trader saying that “some mills didn’t make payments to suppliers,” and weak steel prices have translated into sinking iron ore and metallurgical coal spot prices.

Recent Chinese government policies aimed at controlling real estate markets have resulted in significant declines in construction, with spot coking coal contracts feeling the brunt of the curtailment.

Chinese steel producers have been eager to expand production in an effort to reduce costs, but the demand for finished steel products has not been reciprocated in Chinese markets or abroad from European importers.

Met coal prices for the year have remained relatively flat in 2012, with both premium and second-tier hard coking coal falling US$0.50/MT to $223/MT and $191/MT respectively in the last ten days.

Labour disputes at BHP Billiton Mitsubishi Alliance’s Australian coking coal mines have also created disturbances for met coal markets, adding about US$15/MT to premium low-volatility hard coking coal spot prices since force majeur was declared at the mines in April.

The disruptions in Australia have led some buyers, like Indian coking-coal exporter JSW Steel Ltd. (BOM:500228), to look to Africa and Rio Tinto’s (LSE:RIO,NYSE:RIO) Mozambique mine to supply its 15 percent planned increase in steel production over the coming fiscal year.

Thermal coal drops

Thermal coal demand globally has also been stifled by a combination of falling demand and rising production costs. Bloomberg reported that in China traders have asked to delay shipments of Indonesian steam coal for as much as two weeks on sufficient supplies.

In the US, Patriot Coal Corp. (NYSE:PCX) announced that it is seeking loan refinancing after reporting that a customer could default on a contract and send the stock price spiralling.

Mark Levin of BB&T Capital Markets told Reuters that the “thermal coal market is as bad as it’s been in modern history and combined with mining costs in Central Appalachia, it is difficult to make any money.”

Data from RBC Capital Markets analysts reported by The Vancouver Sun shows that thermal coal prices are down 15.9 percent on the year, with larger falls in specific basins. Asian benchmark thermal coal out of Newcastle, Australia has fallen to the lowest levels since October of 2010, settling around US$99.95/ton.

Emergent growth persists

Coal price declines and the presence of fear within the coal sector have received persistent attention in recent weeks, particularly in regions with high operation costs. While swings in the thermal coal space have moved in response to the fall of relatively complementary resources (natural gas) and weak macroeconomic support out of Europe and China, some analysts believe the sell-off in the US coal space has been too deep and too fast.

“Global macro factors have been dominating the coal trade, while industry fundamentals have not deteriorated in recent weeks, and we find in some cases improving” Michael Dudas, a senior research analyst at Sterne Agee, told clients in a note.

“We believe U.S. coal equities are oversold. Despite an accelerated risk-off trade, we find recent data points encouraging and shares under-priced,” Dudas added.

In particular, interest in locating and developing new coking coal resources remains strong despite the short-term slowdown in steel end-product consumption.

An Indian delegation made up of C.S. Verma, the chairman of the Steel Authority of India, and U.P. Singh, joint secretary of the Ministry of Steel, was in Mongolia’s capital of Ulaanbaatar last week to sign an MoU with the Mongolian government in order to acquire a coking coal mine.

The deal also includes the construction of an Indian-built steel plant to produce for Mongolia’s domestic markets. The surplus will be shipped via Chinese ports to India’s booming construction industry.

The desire for Asian companies to build out an industry rather than secure a delivery continues to be a focus in a number of less traditional markets, with strong interest beginning to surface in Colombia.

Last week, South Africa’s Continental Coal Ltd. (ASX:CCC) recently secured an exclusive option to potentially acquire a 50 percent joint venture interest in an operating Colombian hard coking coal mine for $15 million.

Government support has been a strong component of Colombia’s success, with the Colombian government releasing details last week of its plan to invest more than US$7.5 billion to restore and expand the country’s rail system and improve the Magdalena River.

“We want to have as much foreign participation as possible,” said Luis Fernando Andrade Moreno, president of Colombia’s Infrastructure National Agency. “This is the most ambitious program that we’ve ever undertaken in Colombia for infrastructure.”

Colombia’s resources have a lot to offer to countries focused on the long term. A number of Asian clients have been on the ground searching for BTUs, supporting infrastructure growth, and developing new industries to funnel resources to Asian markets, a source told Coal Investing News.


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

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