Citigroup has raised its coal price forecasts across the board, citing the perfect storm of four months ago, along with persisting global supply deficits of coking, met and thermal coal.
Author: Dorothy Kosich
Posted: Tuesday , 08 Jul 2008
RENO, NV -
Although coking and thermal coal prices soared by 200% to 300% this year in response to a perfect storm of short-term events including Queensland, Australia, floods, coal export bans in China, and the South African energy crisis, Citigroup forecast Monday that coal prices will remain robust.
While the perfect storm has abated, Citigroup mining analysts Alan Heap and Alex Tonks, both based in Australia, suggest that "limited potential for new supply means the coking coal market is expected to remain tight for many years."
Coking coal spot prices are around US$385.t, up $85 since January and above contract prices since 2000. Xstrata is believed to have recently settled at US$360/t for JFY 2008-2009, according to Citigroup.
Heap and Tonks assert that the supply-demand outlook points to persisting supply deficits of coking coal. "Further, it is difficult to identify additional supply sources which will meet the shortfall, even in response to higher prices," they said." The most likely response will be reduced steel production as mills run short of coal. Indian steel producers are the most vulnerable."
"Under these circumstances a severe pullback in prices, even from stratospheric levels, is most unlikely," they declared.
While the U.S. is the marginal supplier to seaborne met coal markets with exports rising sharply, Citigroup suggests that mining and infrastructure will limit export volumes. Nevertheless, the analysts added, "costs are high but margins are attractive."
In spite of a 200% increase in coking coal costs and an 80% interest in iron ore costs, Citigroup said steel producers have maintained their margins through price increases. For instance, steel production costs have risen by about $280/t to accommodate increased coal prices. Iron ore increases are adding a further $90/t, according to Citigroup.
Chinese hot-rolled coils (HRC) steel prices have increased US$460/t, while U.S, HRC prices have increased $600/t. "We expect further increase in steel prices," the analysts advised.
"To defray such cost inflation builders may substitute steel with concrete," they suggested, noting that concentrate prices have increased 120% over the past six years. "However it seems unlikely that the impact of steel prices on total construction costs is sufficient to curtail overall construction and economic activity."
The analysts also suggested that substitutions for coking coal in steelmaking have limited potential.
THERMAL COAL
Citigroup asserted that the perfect storm moved thermal coal prices sharply higher, and have accelerated higher in recent weeks. "The recent pullback is perhaps indicative of increased speculative activity in the market," they added.
Nevertheless, Heap and Tonks noted that China's power supplies remain acutely tight, which normally would cause domestic coal prices to increase "to stimulate further production and imports." However, coal prices have been capped while export volumes are limited by quotas, "which could return to a full ban."
"Reduced imports will only further squeeze Chinese coal and power markets," they asserted.
Meanwhile, Australian thermal coal exports remain impeded although "substantial mine, port and rail expansions have been committed," the analysts said. "But recent delays to expansions support our view of little growth in exports until 2010"
Citigroup noted that Eskom's power rationing has impacted some thermal coal production in South Africa., which may also hamper South African coal export growth. "Exports are down 20%yoy and 25% below capacity."
U.S. coal exports remain a risk to the market although a 40% growth in hard coking coal and 60% growth in thermal coal exports during the first quarter have not derailed the market, according to Citigroup.
Indonesia, the world's largest exporters of thermal coal, supplying 41% of the seaborne market, is critical to the thermal coal market, Citigroup asserted. While the Indonesian government is pushing for additional coal-fired power capacity, the analysts advised that domestic coal demand "will fall short of projections."
While Indonesian coal resources are very large, Citigroup noted that only 14% have a calorific value of more than 6100kcal. Therefore, export markets outside of China and India "will be constrained by the ability of power stations to accept an increased proportion of low cal coal in the blend," according to the analysts.
PEABODY, ARCH FORECASTS UPGRADED
Citigroup's San Francisco-based mining analysts John H. Hill and Paul Cheng said they expect met coal prices to increase through 2009. "However, this view seems discounted in aggressive consensus margins, particularly given the small size and checkered execution history of key miners."
Nevertheless, the analysts noted that "given burgeoning BRIC-country coal demand, signals that thermal may be tightening in a similar manner to met, and increasingly linked commodity markets, it is difficult to see global surplus emerging in the near/medium term. We believe both thermal and met are likely to track higher through 2009."
"We are hiking forecasts across major U.S. [coal] basins to levels in-line with survey data, with Met benchmarked to seaborne. The PRB [Power River Basin coal] is the only areas where forecasts are materially above market," the analysts said.
As a result, Hill and Cheng upgraded Peabody Energy and Arch Coal to a "Buy" recommendation.
