The latest issues for the coal industry are that China has frozen over, Australia is under water, and South Africa is in the dark. These problems have compounded the existing dilemma of infrastructure constraints and the long running cost increases and labour shortages.
As a result, Australian brokerage Bell Potter Securities has upgraded its 2008 thermal coal and coking coal forecasts by 11.1% to $US100 per tonne and 17.2% to $175/t respectively, according to a research note from earlier this month. Thermal coal was predicted to fetch $125/t in 2009 as opposed to the $105/t previously forecast.
“Supply growth globally has been hobbled by several structural factors including cost inflation, labour/equipment availability constraints, and deteriorating resource quality,” Bell Potter stated.
“However, it is increasingly becoming evident that infrastructure bottlenecks, particularly in China (rail/truck and shipping) and Australia (rail and port), are playing a key role in preventing or delaying the product from getting to the consumer.
“The latest infrastructure [issue] to emerge is of course the power supply problems in South Africa, which recently resulted in the closure of some exporting coal mines in the country.”
The weather seems to have cruelly, or kindly, depending on your station in the industry, targeted crucial coal supply points.
“Snowstorms in China and flooding in Australia have disrupted shipments resulting in a significant decline in consumer inventories,” Bell Potter stated.
Thermal coal as a single commodity benefited from a drop in thermal coal at utility level in China, which prompted the country to suspend exports on January 25 for an undisclosed period, predicted to be about two months.
Demand side factors are also working towards a stronger coal price.
“Power capacity in Asia continues to grow rapidly – a function on industrialisation/urbanisation trends, which are long term in nature,” the brokerage said.
The dominant fuel source for this developing population is of course coal, which despite the price increases is still far cheaper than any other reliable fuel.
“In order to allow these emerging economies to grow this resource [coal] is a necessity in our view,” the brokerage stated.
Bell Potter reported that particularly hot conditions for coking coal contracts were present even before the flooding in Queensland. The brokerage stated that Australian producers of pulverised coal injection (PCI) material were indicating 2008 contract price targets of $140/t for Japanese and Korean buyers.
Australian producer Foxleigh also recently won an increase in PCI coal contract pricing with ArcelorMittal of 78%, up to $120/t.
The bullish bulk commodity environment has prompted Bell Potter to re-rate its position on Gloucester Coal, Macarthur Coal and Coal & Allied. The firm has also re-issued price forecasts for several coal and iron ore players it covers.
Gloucester Coal, which operates the Stratford and Duralie mines in the Gloucester Basin of New South Wales, claimed the honour of being Bell's “preferred” coal stock.
The brokerage upgraded its recommendation from Neutral to Buy and its price target from $A7 per share to $7.50/share.
Macarthur Coal and Coal & Allied were re-rated as Buy stocks and had their price forecasts adjusted to $12 per share and 86c per share from $10.50 and 80c respectively.
