In its latest commodity report the major stockbroker detailed its doubts.
“We gauge that the current climate is only going to exacerbate uncertainty over the further expansion of coal chain export capacity in Queensland,” ABN said.
“The industry holds serious doubts over whether coal producers will have the ability to fully underwrite planned infrastructure projects given funding difficulties in the current financial climate. This is compounded by uncertainties over near-term coal demand (and pricing), an area of almost unquestionable strength only months ago.
“We believe the proposed timetables for projects including the Northern Missing (rail) Link, Abbot Point expansion and the new Wiggins Island coal export terminal in Gladstone are likely to face deferral given these funding issues, compounded by volatile swings in demand and prices.”
ABN said such delays may result in the industry returning to the scenario where it is short of export capacity when demand re-intensifies.
“This may result in a cycle of coal prices over-correcting on both the upside and downside,” ABN said.
The stockbroker added the increasing costs of the planned supply chain developments may trigger a significant change in rail and port costs for new projects, “resulting in a skip up in the cost curve for exports from the Bowen Basin”
ABN made a reference to Queensland Rail, which anticipates new charges to slug producers in the realm of $20 a tonne, above and below rail, to underwrite the construction of the Northern Missing Link to Abbot Point, with such an outcome supportive of pricing in the long term.
“We believe it is not only the capital cost that will provide a floor to coal prices, but also the cost pressures faced by the industry, in particular developments that were proposed or brownfield expansions designed to extract the marginal coal tonne at a time of high prices,” ABN said.
Factoring in an increased cost base outlook for producers, ABN is forecasting a correction in metallurgical coal prices as opposed to a rout.
The stockbroker is projecting Queensland hard coking coal prices to fall some 35% from its current forecast to $US200 a tonne free on board for 2009 and 2010.
“Some argue that prices should fall back to pre-Queensland flood levels, which were $US170 per tonne, which may turn out to be correct, but with rain already falling in Queensland it appears that production could remain constrained for some time,” the stockbroker said.
ABN is also expecting semi-soft coal prices to suffer the most in the current downturn.
The stockbroker said semi-soft coal went up the most in last year’s negotiations, almost 250% on the 2007-08 contract period, but with the current fall-off in coke demand it is likely to once again become more closely linked to thermal coal prices.
As result, ABN is forecasting a drop of just over 50% for semi-soft coal contracts in the 2009-2010 financial year.
While noting that international spot prices have thermal coal at below $US100/t and below Chinese domestic spot prices, ABN is keeping its forecast a bit above the $US100/t level for next year, according to the chart in its commodities report.
