Analysts at Mines and Money Hong Kong believe things can only get better in the coal world.
AME Group’s Hong Kong-based general manager Yong Cho told delegates the market was now at the bottom of the price cycle, with coking coal players experiencing a long period of optimisation in terms of productivity and cutting costs, which would in turn lead to pullbacks in supply.
“Current low price conditions are expected to continue for the remainder of the year, but this will in turn trigger a supply reaction which will actually help tighten that market and bring the price back up again,” Cho told delegates.
“We see prices increase in a ‘step-rise’ form over 2015-16; and also in thermal coal we have prices potentially reaching around $US110 [per tonne] from 2018 onward.”
This supply reaction is already evident, he said, with American thermal coal exports reaching a peak, exceeding 50 million tonnes in 2012.
Ever since the price drop, it has put significant pressure on high-cost American producers, hence US exports being “retracted back”, he said.
AME Group’s Sydney-based head of financial institutions Tony Sacre said he believed the impact of substitutions has already been factored into the coking coal market, especially in light of new gas discoveries – a key discussion point for the panel.
“From a new gas discoveries perspective, we’ve already seen an impact on the prices, if you look at where thermal coal prices have gone over the last 12 months, and we’re certainly calling for it to start to bottom out now at about $73/t. We’re looking at an average prices of $84-85/t for 2014,” Sacre said.
“We are quite positive on the market going forward, with $90/t and above for 2015 and beyond. So I would say that the ‘substitution impact’ of new gas discoveries, or anything else where the technology is already known or continuing to go forward, has already been impacted on prices.”
Cho noted that China is still the world’s largest coal producer, and still has a substantial amount of coking coal remaining as reserves under the ground. The view of China as a coal importer only took hold post-2009, and he urged delegates to remember that China’s import volumes being consumed are only about 10% of its total consumption.
On the question of how much will the softening in Chinese growth affect the price, Sacre said the answer “very much reflects the theme today” at the conference.
“It would be our contention that prices have already adjusted accordingly, and we’ll see a flattening, and then an eventual steepening, across the price curve,” Sacre said. “While we are starting to see lower numbers [out of China], they’re coming off a substantially higher base. That just means the total pool of commodities being purchased each year is significantly up.
“Growth will still be there across basically the entire commodities complex. I look after the financial institutions at AME group, so I tend to talk to banks and hedge funds for most of the day. While there are views on substitutions in the market for thermal coal being out there, it’s my contention that it’s already been reflected into the market, like any efficient market would have done. The financial institutions are still very keen on trying to do transactions.”
AME Group chairman Shaun Browne was also boldly optimistic.
“We genuinely believe that the market is recovering,” he told delegates. “Irrespective of the diversity of the views – which is always a good thing – certainly the world is a better place this quarter than last quarter, and it’s a better place the previous quarter than [the one before that]. So gradually, [we are seeing] a continual improvement.
“The steel volumes are slowly and quietly picking up around the world, particularly in some of the more advanced of the developing nations: Brazil is particularly doing well; India has a very large build program going on; China is moving ahead with a slightly different composition of how its steel is being made, with larger furnaces and their desperate requirement to improve their quality of steel to improve their margins – from rebar as a famous product mix in years gone by, now to far more sophisticated steel body panels which are now progressively being galvanised.
“We also see the global economy gradually picking up – not only with the Euro zone which has lifted by half a percent over the past year – which doesn’t sound like much but is certainly better than a pole in the eye with a sharp stick.
“China is looking at a growth rate of 7-8%, probably 7.5% in practical terms if you take into account the statements of President Xi [Jinping, President of the People’s Republic of China]; you’re looking at a credit cycle which is most definitely improving; the recent Roy Hill financing which was an enormous sum of money is a case in point - an unusual change in cycle.
Cho also noted increasing growth, particularly within the emerging markets outside of China, such as Vietnam, which was “starting to really get some traction in terms of growth”