Coal hot, but will it burn out?

TURMOIL in the international coal market in the early part of 2008 has pushed coal prices sky-high, but is this a good or bad thing for Australia? ILN takes a look at two reports, giving similar predictions (but very different outcomes) for coal in 2008.
Coal hot, but will it burn out? Coal hot, but will it burn out? Coal hot, but will it burn out? Coal hot, but will it burn out? Coal hot, but will it burn out?


Christine Feary

Bottlenecks in Australia's coal supply chains, which have grown progressively worse over the past year as demand for coal increases, as well as extreme weather conditions in Australia, China and Indonesia, and power shortages in China and South Africa, have joined forces to push the coal price to record highs in recent weeks.

In spite of these strong prices Citigroup analysts are taking a cautious approach, suggesting problems that have caused prices to skyrocket could highlight deeper issues in the coal industry.

In its industry outlook, released yesterday, Citigroup said that while floods in Queensland will reduce Australia's coal supply in the near term, port and rail constraints will continue to restrict coal exports until at least 2010.

"Tight coal markets are being squeezed by slower growth in exports and stronger demand from Asia, exacerbated by problems in China, South Africa and Australia," Citigroup said.

"We now expect 2008-09 contract prices to be $US100 per tonne for thermal, $US200 per tonne for coking.

"Our analysis points to a continued tightness in seaborne thermal markets extending to 2010. Longer term the structural characteristics of the thermal coal market do not support a radical transformation in the industry. Yet demand is considerably higher than many other commodities. As such we have lifted our long-term estimates to $US50 per tonne."

Macquarie Research Equities took a more positive view of the market in its coal sector outlook report, also released yesterday.

While Citigroup looked at the coal market as a whole, Macquarie focused on the Australian coal sector, saying that, in spite of all the problems facing it, the local coal market will go "from strength to strength" in 2008.

Macquarie named Centennial Coal and Resource Pacific as the companies that would come out on top in 2008, its risk-adjusted valuations placing Centennial coal at $A3.89 per share, with Resource Pacific valued at $A3.19 per share.

Less positive is Macquarie's outlook for Macarthur Coal, which suggests the company will underperform due to limited access to export infrastructure and floods affecting operations at its Coppabella and Moorevale mines in the Bowen Basin.

Despite Macquarie's valuation of Macarthur, which places the company at $A8.27 per share, it said this is not enough to save the company, which it says is "struggling".

"While short-term coal pricing sentiment may provide share price upside, we maintain an 'underperform' recommendation based on fundamental issues and on value grounds. In our view, significant risk remains to earnings forecasts," Macquarie said.

In its overall market predictions Macquarie said: "We have a bullish outlook on coal pricing for the 2008 annual pricing negotiations. We remain confident in our view that coal prices are set to remain elevated for an extended period."

In the report, Macquarie predicted contract prices of $A150/t for hard coking coal in 2008, falling to $A130/t by 2010, and $A100/t for soft coking coal, falling to $A90/t by 2010.

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