Coking Coal: Supply Apocalypse(Now) The loss of ~15mt coking coal capacity in the January / February floods across QLD’s Bowen Basin has driven a supply apocalypse in coking coal. With infrastructure limitations restricting producers ability to make up any of this lost production in the near-medium term, the coking coal market is severely under-supplied on a 3 year view. We expect peak coking coal prices in JFY08E with a forecast premium Hard Coking Coal price of US$300/t. Our forecasts for JFY09E and JFY10E are US$180/t and US$150/t respectively – themselves new records for annual contract deals. However, the lower prices reflect our view that the current spike in prices in 2008 will not be repeatable in a “normal” supply year despite the market still being in substantial under-supply until 2011. All other met coal grades have under-gone major price forecast upgrades on a quality basis (see Table following). We are 50% above consensus prices in JFY08E. Despite the large corrections we forecast in JFY09E and JFY10E, we are still 16% and 11% respectively above consensus. In addition, we have upgraded our long term prices by 14% to US$75/t real and US$89/t nominal 2015 (HCC) and +23% (Semi-hard, ULV PCI, Semi-soft), due to vastly higher operating and capital costs that appear to be at least 40% structural in nature. Australian met coal cash costs are generally 80-200% higher in 2007 vs 2004 levels (Illawarra coal is +200%). The marginal met coal production into Asian markets is now US East Coast Appalachian coal, where freight is a major issue and long term prices of close to US$100/t are needed to encourage the supply. There is upside to our long term coking coal prices. Spot coking coal has always been a thin market with >95% sales transacted at annual contract terms. However, there is now an obvious scramble for tonnes with industry sources confirming that Asian steel mills are begging for tonnes, almost at any cost. We have heard steel mills have even rejected quarterly contracts which could give better annual price outcomes. Steel mills are more concerned with security of supply. Under current market conditions, spot prices seem the best indication of the “hysteria” of the supply shortage and therefore spot appears a reasonable guide for contract settlement. A spate of new business has been struck in Asia by US and Australian coking coal producers in the last 2 weeks for considerable tonnage (>800kt) which has taken the thin spot market to new highs of US$330/t. According to McCloskey, 2 Australian producers (including Peabody) have agreed with Asian customers at $300/t FOB covering a combined 650kt-plus. One of the producers subsequently signed three $330/t FOB agreements. A US$375 deal is thought to be imminent. The agreements are said to be “not for India, not for Turkey, not for coke tolling,” but for mainline traditional customers. From the US, a number of $325/t FOB settlements have been made, again all into Asia. Tight supply has been exacerbated by China essentially withdrawing from coking coal exports, as internal demand soars and coke stockpiles decline to historically low levels. China is essentially in balance in met coal and we expect it to stay this way. Demand for global seaborne metcoal is primarily driven by Brazil, India, Japan, Korea and Taiwan. The coke price (ash 12.5%) has rallied to 2 year highs of US$510/t FOB China, +300% since May 2007. Coke’s price has been supported by expanding domestic Chinese demand, the shutdown of coke plants with insufficient environmental controls and higher export taxes (export tax increased from 15% to +25% from 1 Jan 2008). The major exporters of coking coals are Australia and Canada with 58% and 11% respectively of world seaborne supply. However, the US has increased exports as prices have risen. In 2007, the US exported 29mt (12% world supply) and we expect US producers to export 32mt in 2008 (14% world supply) as prices have escalated to such extreme levels. The rapid appreciation of the A$/US$ and C$/US$ to ~0.94 and >1 has impacted costs of production and margins for coal producers. With ~60% global supply from Australia and Canada, in the last few years the producers have continued to experience rising input costs, higher local FX vs US$ and declining margins. We do not believe this will be an issue this year as the price increases likely are so much greater in magnitude than the cost increases. Margins and returns for met coal producers should be at record ever levels in JFY09.
RIV Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
