Coal to Rise on Seasonal Buying

After months of declining prices, coking coal producers are struggling to remain optimistic that demand support will return soon.

This quarter’s US$170/metric ton (MT) benchmark coking coal contract, signed by Japan and Australia, is one of the clearest indicators of the current situation. The contract represents a 24 percent decline from Q3’s $225/MT benchmark and an almost 50 percent fall from last year’s high of $330/MT. Current coking coal spot prices are even worse, hovering around the $150/MT mark.

Outside of the Asian market, European prices have also fallen. Reuters reported that Czech coal miner New World Resources (LSE:NWR) has seen fourth-quarter coking coal prices of €102 (US$132)/MT, 20 percent lower than the previous three months.

Contractions in manufacturing in China and India are key factors impacting the coal industry. Stimulus and infrastructure spending promised by both countries has given coal investors some confidence that demand will return soon.

A recent announcement from Kamal Nath, India’s minister of urban development, shows what that demand could look like over the coming years.

Nath commented that India’s coking coal imports are set to increase by about 100 million MT by 2016 to 2017. The country’s port infrastructure will require much improvement if that forecast comes to pass; luckily, India’s 12th five-year plan, which runs from 2012 to 2017, includes $1 trillion in infrastructure spending.

“In India, growth has preceded infrastructure development. All that we will do in the next five to eight years would not be building for the future but catching up with the past,” Nath said.

China’s stimulus package, also rumored to top US$1 trillion, is bound to boost coking coal prices and will likely cause contract price predictions to rise to at least $180/ton for the January to March contract period.

Pukhraj Sethiya, mining manager at PricewaterhouseCoopers, a global accounting and consultancy firm, told China Daily that support in the new year will come from Chinese stimulus and the return of Japanese imports as that country rebuilds its manufacturing industry.

Sethiya believes the average price of coking coal will be $200 to $220/ton for the 2013 calendar year.

Thermal coal

Expectations of winter stocking in the northern hemisphere led thermal coal prices higher this week after months of weak demand.

Platts reported that UBS, a Swiss financial services company, has advised thermal coal industry participants that as production cuts in recent months have “re-balanced” trade, thermal coal buyers are now poised to deliver a pre-winter restocking price lift over November and December.

The spectre of rising thermal prices this winter, while welcome news for producers, rubs up against the longer-term predictions that lie behind the recent rumors of thermal coal market reforms in China, the world’s largest coal consumer.

The Australian cited local Chinese media reports that indicate the country’s desire to reform the way state-run coal companies and energy producers negotiate prices within the country.

Reports suggest that China’s cabinet is considering a proposal that would provide state-owned miners with more freedom in negotiating coal supply and prices with domestic power producers. That could result in closer tracking of Chinese coal prices compared to international prices.

China’s thermal coal demand has outstripped its domestic production capacity in recent years, and in 2009 forced the country to seek international imports for the first time. A market formerly dominated by Japanese and Indian consumers, seaborne thermal coal is now taking strong cues from Chinese consumers.

UBS also released an advisory stating three trends that should shape the thermal coal industry’s next four years. The recovery of global prices could prompt: a partial switch back to coal-fired power generation in North America; the redirection of coal exports by Indonesia and South Africa to their domestic markets; and the ramp-up of China’s coal production capacity, which could reduce its import demand.

Company news

Cardero Resource (TSX:CDU,AMEX:CDY) announced late last month that it has increased its measured and indicated resource at its Carbon Creek property in Northeast British Columbia from 166 MT to 468 MT. It also established that its initial proven and probable reserves now top 121 MT with an initial 20-year mine life.

Angus Christie, Cardero’s COO, stated, “I believed when I joined the Company that we had an opportunity to turn the Carbon Creek asset into one of the largest producing, lowest cost operators in the region. This report demonstrates that we are in position to turn our expectations into reality and establish this asset as the benchmark against which other developments in the region will be evaluated.”

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