The research division of the Macquarie Group said the major downgrades came from coal moving from a chronic shortage environment to a small surplus for thermal coal and a large surplus for coking coal.
While the investment bank forecast iron ore contract prices to drop 20% for next year, hard coking coal prices have been revised to hit $US140 per tonne free on board, down 60% from the previous estimate of $US350/t FOB.
Thermal coal, on the other hand, has been anticipated by Macquarie to sink to $US105/t FOB, down 38% from the previous estimate of $170/t FOB.
In regard to coking coal, Macquarie said it was hearing reports of a decline in demand from Ukraine and India.
“Market participants are now expecting a massive fall in prices if any spot business is in fact transacted, probably to below $US200 per tonne free on board, although none of the suppliers are apparently willing to quote such prices at the present time.” Macquarie said.
ANZ’s commodity price review was bolstered by a two-week trip by experts to China and South Korea.
“The feedback we got was that conditions are (and will get) worse than we previously thought,” said senior commodity strategist Mark Pervan.
While oil, iron ore and copper were subject to ANZ’s biggest downgrades, coal did not fare too well either.
Premium coking coal has been downgraded from $US305/t FOB in the bank’s previous estimate to $155/t for the 2009 forecast, a fall of over 49%.
Meanwhile, the forecast for free on board prices for hard coking coal has fallen 50% from $US270/t to $US135/t.
Forecasts for semi-soft coking coal and pulverised coal injection coal are 54% lower, from $US240/t to $110/t, and thermal coal price forecasts have been cut 40%, from $US125/t to $75/t.
Despite the drop in forecasts the bank noted that metallurgical coal will fall an average of 50% – but after stellar gains of over 200% in the current year.
“Falling steel output and prices is a major drag for metallurgical coal, with steel mills now well-stocked after very tight coal supply conditions in early 2008,” ANZ reported.
“The 50 per cent drop in Chinese coke prices over the past three months is also a good indicator that contract seaborne coking coal prices will follow a similar track.
“Spot prices appear to be consolidating around $US100 per tonne, but further falls in oil prices and slowing electricity demand in China (and elsewhere) will drag prices lower. A 5-10 million tonne overhang of Chinese coal port stocks (from delayed export quotas) also suggests China will remain a coal net exporter for a while longer.”
Looking briefly at the iron ore market, ANZ said China’s largest iron ore port normally received 10 vessels a week and was currently receiving only four.
“Coke (or refined coking coal) stocks are rising fast as domestic demand falls,” ANZ said.
“The reduction in the coke export year (by two months) from February to December means that January and February export tonnes (about 2.5 million tonnes) will be re-diverted back into the domestic market, further inflating supply and lowering prices.”
Considering the bank had a well-timed trip to China, ANZ had some insights on the Chinese government’s possible course of action and of investment possibilities in Australia.
“The view is that the government will let a large number of small to medium-sized enterprises fall over (particularly in the metal industry) – and let the larger, more cashed-up producers consolidate what is still a very fragmented market,” ANZ said.
“There is a lot of interest in the sharp fall in the Australian dollar and the potential it brings for investment opportunities in the Australian mining sector.
“The most sought after targets talked about are for large resource iron ore, coking coal and nickel assets.”
ANZ said the 4 trillion yuan ($US585.88 billion) Chinese government stimulus package was not likely to impact commodity demand until late 2009 or early 2010.
