"We regard this situation as a minimum two year story and believe that super-normal prices will persist through 2008 and 2009 before moderating from 2010 as supply and demand in seaborne markets become more closely aligned," Goldman Sachs JBWere analysts said.
The brokerage raised its medium term coal price forecast for thermal coal to $US90/tonne from $75/t; hard coking coal to $150/t (formerly $95/t); and low-vol PCI $120/t (formerly $95/t).
It also predicted similar pricing for the three grades into 2009/10.
"The recent surge in spot coal prices (thermal - $100/t FOB Richards Bay; hard coking - over $170/t FOB Queensland; Russian PCI - $160/t FOB Baltic ports) is symptomatic of the structural imbalances in traded coal markets.
"Interestingly, for both thermal and coking coal, India has been the recipient of spot cargoes at these elevated price levels, showing that the emergence of India is now having a very significant impact on selected commodities," Goldman Sachs JBWere said.
The brokerage said Australian coal suppliers were well positioned to achieve big price gains during the current round of contract negotiations - especially those with "tier 1" brands. However, it expected significant discounting will be applied to lower rank coal brands.
Thermal coal will be a big winner - with current spot prices around the world reflecting extremely tight demand. Reports indicate some deals out of Richards Bay hitting highs of $100/t FOB.
The analysts attributed the price highs to strong demand from India coinciding with a series of supply disruptions/constraints, including a fire at an electrical sub-station on the Richards Bay rail line which could reduce capacity on the line by 50% for two weeks.
Constraints at Newcastle Port, and a growing awareness that additional shipments of Indonesian sub-bituminous coal will be insufficient to meet the needs of Asian buyers, have all kicked in to push thermal prices.
"Following recent meetings with coal industry participants in Tokyo, we understand that major Australian coal shippers are now targeting floor prices of about $85/t for annual contracts with Japanese power utilities," Goldman Sachs JBWere said.
While thermal coal is cashing in, semi-soft coking coal will not necessarily fully follow. While the brokerage raised its contract prices to $102/t for 2008/09, it said semi-soft was not subject to the same "demand pull" from India and China and that Japanese steelmakers were already "well stocked".
The strength of hard coking coal has been passed onto low-vol PCI coal with steelmakers looking to maximise coal injection rates. Goldman Sachs JBWere analysts said they had recently heard reports of Russian low-vol PCI trading at $160/t FOB Baltic to European buyers - 235% above current Australia/Japan contract prices.
"We acknowledge that such high prices [$120/t] will encourage exports from Russia and potentially China, which has abundant suppliers of semi-anthracite, but the major contract buyers have limited flexibility to move away from their core Australian suppliers and will have little alternative to paying high prices to ensure a consistent supply of this increasingly valuable product," the analysts said.
Hard coking coal is predicted to be a big winner - Goldman Sachs JBWere says the market is growing by 4% (6Mtpa), however it says it struggles to find where that extra tonnage will come from in 2008-2009.
It said the US had traditionally performed the role of "swing supplier", and it anticipated a major export campaign by US suppliers, targeted at European steel mills.
"Against this backdrop, we believe the major Australian suppliers of top rank brands of low-vol hard coking coal will be targeting at least $150/t FOB in their negotiations with Japanese steelmakers, scheduled to commence mid-December."
Goldman Sachs JBWere upgraded their recommendation on Centennial from hold to buy, and had Macarthur Coal as its number one pick - given its leverage to PCI coal.