Great time to buy, basic point is that coking coal price is robust , with supply tight and demand increasing. Yet ASX listed coal stocks have recently fallen 60 to 95%. Have a read
Weak coking coal equities disguise true potential
DAN HALL Australian-listed coking coal developers and explorers have suffered their worst rout since the global financial crisis as investors flee the stockmarket amid broad global economic uncertainty.
But as coking coal prices are still well above historic highs, some investors and analysts say that now is the time to get exposure to metallurgical, or coking, coal, which is used to make steel.
According to a portfolio manager at one of Australia’s largest resources-focused hedge funds, premium hard coking coal has a positive outlook over the next three to five years.
“The key point is that the ASX-listed coal equity prices have fallen 60 per cent to 95 per cent, while the coking coal price has been robust,” the portfolio manager said.
China’s annual steel production is expected to uphold demand for coking coal in coming years, although the country can meet most of its own coking coal needs. This means that demand from outside China is the key driver for met coal.
However, recent record crude steel output in China has tightened the market.
“Despite talk of a slowdown in China at the moment, the recent steel production numbers from the China Iron and Steel Association showed record steel production,” the portfolio manager said.
According to Macquarie Bank’s analysis, China’s crude steel output hit a record annualised rate of 743?million tonnes in the last 10 days of April. The record prompted a recent rally in the spot price of hard coking coal to $US220 a tonne, and Macquarie expects this to rise even more.
“Recent weeks have seen a mini-revival for met coal, with spot prices trending up $US10 a tonne,” Macquarie said. “We expect to see it slowly pull further out of the price trough in coming months.”
On the supply side, Australian coking coal supply represents about 60 per cent of seaborne supply, which means Queensland supply issues tend to send prices rocketing.
Macquarie said tight supply in Australia and increasing demand from the key Asian contract buyers of India, Japan and Korea would soon put upwards pressure prices.
“We would reaffirm our view that the metallurgical coal market remains structurally tight, even given the cyclical weakness over the past six months,” Macquarie said.
Macquarie’s position is backed up by US coal giant Peabody, which expects Chinese steel production to rise owing to major interior demand growth.
Steel consumption per capita in China, India and Brazil is well below other developed nations, including Japan, which has a stable stage steel intensity of 900 kilograms per person, according to Peabody’s analytics team.
Peabody forecasts that about 1.2 billion tonnes of metallurgucial coal is required for steel consumption per capita in China, India and Brazil to match the levels of Japan, Taiwan and Korea.
Despite the outlook for coking coal prices, Australian-listed coking coal juniors Carabella Resources, Bathurst Resources, Cokal and Jameson Resources have each suffered in varying degrees due to concerns over world economic growth.
Carabella has been tipped as a takeover target ever since listing.
The company has delineated a Joint Ores Reserve Committee-compliant coking coal resource of 141 million tonnes at its flagship Grosvenor West project.
But shares tanked to a 12-month low of 66.5¢ last week after hitting a high of $2.98 in March 2011.
RBS Morgans analyst Tom Sartor has set a price target of $1.55.
“We see Carabella’s exposure to potential hard coking coal production at near benchmark quality as the core premise for investing,” Mr Sartor said.
Coking coal developer Bathurst Resources, which has been the subject of environmental protests in New Zealand, has also suffered in the current market.
Despite having a large portion of its coal supply in the bag once it enters production, Bathurst’s shares have dropped from 80¢ in early March to as low as 42.5¢ late last week.
Indonesia-focused coal explorer Cokal has several coal exploration licences in emerging coal districts in East Kalimantan, Indonesia.
The company is aiming to fast-track production by transporting coal along river systems in Kalimantan to transhipping facilities closer to the coast.
But Cokal is also the cheapest it has been for months, its shares halving since March.
Cokal shares were worth about 60¢ in early March but they are now trading about 28.5¢.
Jameson Resources is targeting coking coal projects in coal projects in Western Canada and in early March announced that it had received coal licenses in an area home to five of Canada’s operating hard coking coal mines.
Yet the company’s share price is currently 31¢, well below the company’s trading price of more than 40¢ in March.
AKM Price at posting:
13.5¢ Sentiment: ST Buy Disclosure: Held
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