China’s growing steel industry would ensure that Macarthur Coal receives record prices for its pulverised coal injection coal, overcoming weather disruptions in Queensland to triple its first-half net profit year-on-year to $115-125 million, the company said yesterday.

Brisbane-based Macarthur is on course to produce up to 2.7 million tonnes of coal in the half and would not suffer as badly from the torrential rain as fellow miners Anglo American, Xstrata and BHP Billiton, which are expecting lower production in the second quarter.

Macarthur chief financial officer Graham Yerbury told a UBS Coal and Iron Ore conference that Chinese steel production remained higher than pre-global financial crisis levels, even though it had slowed in the September quarter because of seasonal weakness, closure of inefficient mills and a drive to reduce power consumption.

“Strong growth is forecast from China, India and Brazil,” he said.

“We expect ageing coke ovens and blast furnace expansions to create stronger differential growth for [low-volatility] PCI.

“Despite seasonal wet weather, Macarthur currently remains on track to reach [its full-year] sales target of 5 million tonnes, with a target of 93 per cent low-volatile PCI coal sales.”

In 2009-10 Macarthur made a first-half profit of $39.6 million and a full-year profit of $125.1 million.

Yerbury said there was an expectation in the industry of improved conditions in the March 2011 quarter for metallurgical coal sale prices.

Thermal coal front

The wet weather and surging demand has pushed the spot price of thermal coal to $US100/t, above the current December quarter contract price of around $US97/t.

Goldman Sachs last month raised its 2011 thermal coal price target to $US105/t and expects coal supplies will tighten in the northern winter.

“Companies still report that demand for all coal types into the Asian market continues to be strong. Asian steel mills are returning to higher capacity utilization and thus consuming more coking and PCI coal,” Patersons coal analyst Andrew Harrington said in a recent research report.

“Thermal coal prices have recently softened … partly this is being blamed on the off-peak demand of the northern hemisphere summer but also China, which was the biggest element in the recovery in demand over the past 18 months, may be slowing it economic growth.

“The worse than usual rainy season in Indonesia has limited that country’s export growth, which has limited the falls in prices.”

Last month the Bureau of Meteorology warned coal producers of a potentially rough wet season ahead thanks to the La Nina weather pattern.

The pre-season heavy rainfall has already hurt stockpiles and upset preparations – founding genuine fears that Queensland mines are not ready for the wet summer.

“Inventories of raw coal and overburden in advance are currently low and, while remedial action is being taken to increase inventories, further wet weather has the potential to negatively impact saleable coal production,” New Hope warned in its recent quarterly.

“A review of water management and pumping action plans took place during the quarter in order to prepare for the wet season expected to begin next quarter.”

Pressure on infrastructure

Emerging players in the new mining areas of the Galilee and Surat basins have to vie for coal-loader space on the Queensland coast with both large and small companies in the established Bowen Basin.

The $5 billion Dudgeon Point port development near Dalrymple Bay Coal Terminal is becoming a higher priority for the Queensland government as pressure mounts to lock in export capacity and benefit from soaring coal prices.

Dudgeon Point, which lies about 5 kilometres north of the Hay Point coal terminals owned by BHP Billiton and Dalrymple Bay Coal Terminal Management (DBCT), is expected to be the port of choice for Indian giant Adani Group, which recently paid Linc Energy $750 million for its coal exploration assets in the Galilee Basin.

DBCT, in conjunction with Adani and North Queensland Bulk Ports, is the preferred tenderer for a doubling of planned capacity at Dudgeon Point to 120Mt per annum.

While first exports from Dudgeon Point were slated for late 2016, coal miners are believed to be pushing for a quicker approvals process and an earlier production date of 2015 to capitalise on historically rising prices and demand for coal.

New round of M&A activity

The access to port infrastructure is not only slowing the supply of coal to the market, it is also making those smaller companies that are ahead in the queue desirable as takeover possibilities.

Cashed-up global miners as well as local companies with strong balance sheets are expected to go on a new round of merger and acquisition activity before the next expected surge in coal prices.

Macarthur remains a potential takeover target despite aborted attempts earlier this year by US giant Peabody Energy and New Hope Corporation that were interrupted by the introduction of the Resources Super-Profits Tax and the first European sovereign debt crisis.

Credit Suisse yesterday upgraded its recommendation on Macarthur from underperform to neutral and the share price rose by 1c to $11.41 in a falling market.

Bandanna Energy, whose share price rose by 8c to $1.35c yesterday, is seen as an infrastructure play for a major player because it has early locked-in capacity at the Wiggins Island Coal Export Terminal.

While New Hope works on securing a takeover offer for Northern Energy Corporation, chairman Robert Millner revealed to ILN there could be other explorers in its sights.

He said there were only a handful of coal producers left.

“There are quite a few companies with very good exploration areas,” Millner said.

“We are in a very strong position, so we will concentrate on this one [NEC] for the moment but we are happy to keep looking.”

NEC and other Surat Basin players are waiting for the Queensland government to declare a state development area for the Surat Basin Railway, allowing for 210km of railway development to link Wandoan with the Moura line, also known as the Southern Missing Link.

NEC said the SBR joint venture, which consists of Xstrata, QR National and the Australian Transport and Energy Corridor, was working towards a financial close in the last three months of 2011.

The rail development is designed to sync in with the construction of the Wiggins Island Coal Export Terminal.

NEC said the Gladstone export facility could be ready to start Surat Basin shipments around the end of 2014 or early 2015.

Xstrata has forecast first Wandoan exports to start as early as 2014.