Supply-demand balance shifts in coal miners' favour

THE coal industry faces its brightest prospects for some years, according to a Hartley Poynton equities research paper, which saw coal at the base of the pricing cycle.

Greg Tubby

It said cuts to contract prices and restrained output have tightened the supply-demand balance considerably, with a 5% price increase likely for both steaming and coking coal - and up to a 20% rise possible for steaming coal.

Supply shortfalls have become so chronic in recent weeks that some producers are reportedly buying coal at prices up to US$5 per tonne above contract from third parties simply to fulfil existing contracted volumes where consumers have exercised +10% options on tonnage.

Prices rose 40% in 2000 to about US$28/t, and Hartley Poynton forecast strong increases for the next three years, irrespective of whether the US economy has a hard or soft landing, a concern which puts a late cycle rally in metal prices at some risk.

However, Hartley said there are risks to its bullish view of coal. The primary concern is the Chinese suppliers, which are seen as undisciplined when it comes to market sensitivity in relation to supply.

"In their drive for foreign exchange they almost single-handedly created oversupply (with Japanese encouragement) in last year's negotiations causing spot prices to collapse below US$20/t. Their timing could not have been worse as it occurred at the very sensitive time of the annual negotiations."

However, Chinese exports have slowed significantly in the past few months due to apparent chronic domestic shortfalls.

On the environmental front, the latest negotiations in The Hague to ratify greenhouse gas emission targets under the Kyoto protocol ended without agreement. "While this gives steaming coal a temporary reprieve, the longer-term issue remains," the stockbroker said. "Irrespective of the economic benefits and scientific facts, this emotive debate has assumed a dangerous political edge that is becoming increasingly difficult to counter."

A further area of concern is the impact of the Australian/US exchange rate on Australian exporters. With the Australian dollar below US55c, producers are able to better tolerate weaker prices, but while the Australian dollar is potentially a pressure point in the negotiations, the current supply tightness should render this an insignificant issue, Hartley said.