Base metal miners had their time in the sun earlier this year, but coal and iron ore are now the flavours of the month.
The India-China spot iron ore price is up nearly 50% from its April low to roughly $US94 a tonne (landed in China, including freight).
And coal is also rebounding, with Macarthur Coal yesterday pointing to a “more positive outlook for the metallurgical coal market over the next few months”
The main demand driver, as usual, is China, though some brokers note that India looms large as a major influence on prices over the next decade.
You can easily see the “bulks” effect by looking at share price movements since the start of the new financial year.
The Metal Detective’s random sample of three iron ore miners – Fortescue Metals Group, Mount Gibson Iron and Atlas Iron – reveals individual share price gains of 20-32% in July to date.
Similarly, three coal miners – Macarthur Coal, Centennial and Felix Resources – have enjoyed price rises of 16-19%.
Some nice capital gains there – much better than bank interest.
But MD wonders whether the market is getting ahead of itself on the global recovery story, particularly given BHP Billiton’s wishy-washy comments in last week’s quarterly.
For those who missed it, BHP said underlying demand trends were hard to read because of de-stocking and stocking activities by its major consumers.
China’s inventory build is “essentially complete, while we are now seeing evidence that restocking has commenced in North America, Europe and Japan”, BHP said.
Sounds fairly bullish until you read the next sentence: “However, commodity prices will be influenced by supply responses due to latent capacity currently existing in the industry.”
In other words, further price gains will be capped by miners bringing on idled projects.
In contrast to BHP’s Nervous Nelly comments, giant US coal miner Peabody Energy was extremely bullish during its quarterly conference call last week.
According to a summary of the call by Credit Suisse, Peabody believes more than 200 gigawatts of new global electricity generation is due to come online over the next five years, representing an “incremental annual 700 million tonnes of coal demand”
“All of the emerging markets are powered by coal; coal was the fastest growing power source in 2008 and also over the last five years,” Credit Suisse says.
Interesting stuff – you’d never know that developed nations, including Australia, are agonising about ways to trim their carbon emissions.
CS says that Peabody is “hugely bullish on Asia generally and India specifically, where it expects the most growth in coal volumes to come from over the next decade”
“Peabody is scaling back US operations and focusing on expansion in Asia, particularly Australia, including setting up an Asian coal trading business,” the broker says.
As for China, Peabody believes the Asian powerhouse “soaked up” the excess supply from the first half caused by traditional customers (Japan/Europe etc) de-stocking.
When those traditional customers come back to market at the same levels, Peabody believes the market will need to support a “new, higher level of demand from China/India”
The US miner also reckons a lack of mine investment will cause a sharp rebound in coal markets when economies recover.
“The company cited that the spot price of metallurgical coal has moved above benchmark settlements, and believes markets could tighten further over time,” CS said.
Coal’s pricing trend looks to be mirroring iron ore, where spot prices recently nudged above 2009 benchmark prices.
And freight rates have climbed noticeably, due to the surge in demand for dry bulk vessels, says Merrill Lynch.
As of last week, China’s current landed price for Brazilian iron ore was $US98 per tonne (including $40/t freight), Indian $94/t ($23/t freight) and Australian $77/t ($16/t freight).
These figures are a reminder of the freight advantage China enjoys from buying Australian – as opposed to Brazilian – iron ore.
It is why Rio was able to up the ante a year ago and screw a better price out of the Chinese mills than the Brazilians.
A lot has changed in 12 months, of course – the GFC, global recession and, just lately, China arresting Rio’s iron ore executives as part of a Politburo crackdown on the country’s steel sector.
China may not like Rio’s tactics in iron ore, but it can’t do without Australian ore – it is the cheapest by a country mile.
*Metal Detective is a weekly column on ILN’s sister publication MiningNews.net.