ANZ slashes coal hopes

ANZ Research has lowered its coal price forecasts by 7-17% over the next three years due to factors such as excess supply, weakening demand and the impact of lower oil prices.
ANZ slashes coal hopes ANZ slashes coal hopes ANZ slashes coal hopes ANZ slashes coal hopes ANZ slashes coal hopes


Blair Price

The bank lowered its 2015 coking coal price forecast by 7% to $115 a tonne. The 2016 forecast was slashed 10.4% to $121, the 2017 forecast was downgraded by 13.6% to $128/t while the 2018 estimate was cut 13.3% to $130/t.

ANZ slashed its 2015 spot thermal coal forecast by 7% to $66/t, the 2016 forecast fell 10.3% to $72/t, the 2017 estimate was reduced by 11.5% to $77/t while the 2018 forecast was sliced by 11.1% to $80/t.

While Macquarie Wealth Management recently predicted that Japanese annual thermal coal settlements will fall by 22% to $64/t from April, ANZ lowered its expectation by $5/t (7%) to a more optimistic $70/t.

In making its revisions ANZ said lower oil prices and a heavy focus on cost reductions is lowering the floor.

While China has reduced coal imports into the country through a combination of quality-related import restrictions and new imported coal tariffs, ANZ said there was a lack of supply discipline in Australia.

This was mainly blamed on “onerous take-or-pay infrastructure commitments” with this source of high cost supply “inhibiting a price recovery to more sustainable levels”

While the circa 10% lift in Newcastle-export thermal coal prices over the past month provided some welcome relief, ANZ senses change in the air.

“As northern hemisphere weather conditions warm, seaborne prices should retrace back towards the mid USD66/tonne level,” ANZ said.

The bank said there was a more disciplined supply response when it came to coking coal but forecast Chinese steel demand to fall for the first time in 35 years.

The oversupplied housing market, accounting for about 40% of Chinese steel demand, was a key hurdle.

“The overhang of housing stock will likely take 12-18 months to work through, which means fresh real estate activity is likely to be very modest in the meantime,” ANZ said.

BHP Billiton aims to reduce its coking coal costs by 10% this year and its thermal coal costs by 15%.

Yet cutbacks will only buy some troubled operations more time.

“For the industry, we expect production costs to decline a further 5-10% in 2015 supported by uncontrollable factors including more competitive exchange rates, lower oil prices and cheaper freight,” the bank said,

“These cost reductions are likely to improve the survival of marginal producers in the near term – delaying the closure of high-cost supply. This is more likely in thermal coal where a larger number of distressed producers will receive a healthy margin improvement.”

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