Newcastle Thermal Coal Rises to Record on China Cuts...

Newcastle Thermal Coal Rises to Record on China Cuts (Update1)
Australian coal prices have broken records the last three weeks in a row. Just last week at Newcastle, our biggest port, the spot coal price crashed through US$125 per tonne. It was up almost 8% for the week.

You and I have both seen this exact same scenario. Remember? Only last year, iron ore was the pet topic for Aussie papers. It’s still a good long-term prospect in our opinion. But the crux of the issue was this: iron contract prices lagged the spot price.

Iron giants Rio Tinto (ASX:RIO) and BHP (ASX:BHP) are now making amends. Credit Suisse is the boldest forecaster, predicting a 70% gain in contract prices. But its boldness might not be misplaced.

The key here is to looking at the differential between contract prices and spot. And the differential in the coal sector deserves your attention. Your attention is, of course, as valuable as any commodity is at the moment, in such a volatile market. But if you’re going to spend it somewhere, you’d be wise to take a look-see at the coal sector.

Coal contract prices are slack, at around US$55. The big investment banks (Macquarie, UBS) have pondered this one…and they came to the conclusion that coal contracts could double by the end of the year. Looking at the graph below, it’s probably not a bad guess. The differential is widening.

The contract negotiations begin on April 1st. Stocks will probably begin pricing in the gains well before then.