prospects for coal Bullish Prospects For CoalDecember 06 2005 -...

prospects for coal Bullish Prospects For Coal
December 06 2005 - Australasian Investment Review

Merrill Lynch is attending the McCloskey Australian Coal Forecasting Conference and has come away with the following comments from the opening day.

The broker believes the main point to emerge from the first day of presentations was the metallurgical coal market remains very tight, with supply likely to struggle to meet ongoing strong demand driven by steel capacity increases.

Despite this, the broker notes the conclusion of the conference was for price falls in the upcoming round of contract negotiations.

The broker notes the McCloskey Group is anticipating hard coking coal prices would settle around US$115/t, while semi-soft and high volume PCI coals would settle closer to US$60/t.

Comments at the conference also highlighted the growing importance of the Indian market, the broker noting figures showing it represented the best demand growth for Australian exports.

The broker also noted the view of Tradition Financial Services, which specialises in freight rates, that freight rates would fall in 2006 due to capacity increases.

But as the broker points out this offers an opportunity for Australia, as while currently little coal is sent to the European market the differential in premiums between South African and Australian coal is now greater than the freight rate, meaning more exports to Europe are likely.

The broker notes BHP Billiton’s (BHP) presentation at the conference, while containing little new information, emphasised the company’s bullish view on metallurgical coal.

It is the company’s view while strong demand will be supportive for prices so will infrastructure constraints that will limit the ability of suppliers to actually meet demand for the next 1-2 years.

On the company’s forecasts, seaborne met coal demand is expected to grow by 4.3% annually to 2007, with the longer-term fundamentals equally as encouraging.

The broker notes BHP has also reiterated its target of 100m tonnes of coal production annually by 2010.