Commodities | Apr 21 2006
Favourable conditions ranging from strong steel production growth to a colder winter in parts of Asia and Europe has given a boost to coal prices, but in the view of National Australia Bank’s economics team supply increases over the course of the year should see prices drift down from current levels.
The bank notes infrastructure constraints that had been in place in Queensland and New South Wales are being dealt with through the expansion of port facilities, which should help boost total Australian exports.
As a result the bank suggests the tight fundamentals of the first few months of this year, which pushed coal prices higher as demand remained strong, are likely to give way to a gradual easing in prices as Australia lifts its exports and Indonesia production recovers.
The thermal coal market offers an example, the bank forecasting a 2.6% increase in global supply this year to 585m tonnes despite a likely fall in the level of exports from China.
The bank suggests Australia should also enjoy a larger share of the metallurgical coal market, as while a 4.3% increase in traded tonnes is forecast only Australian and Canadian producers appear able to lift exports this year.
With semi-soft coal prices having fallen to US$55/t this year from US$85/t last year, there remains the potential for consumers to implement some switching into weaker blends of coal to save costs. The bank discounts the likelihood of this having a significant impact on prices though, as substitutability is limited in terms of steel production.
At GSJB Were the experts points out there is likely to be a greater impact from customers deferring coal purchases, as evidenced by the quarterly production result by Rio Tinto (RIO). If this trend continues there is the potential for downside to current earnings estimates in the coal sector, the broker estimating sales of 75% of current forecasts would cut BHP Billiton’s (BHP) earnings by 1.2% in FY06, while for Excel Coal (EXL) and Macarthur Coal (MCC) the impact would be around 5%.
National Australia Bank is forecasting thermal coal prices to average US$50/t this year, easing to US$46/t in 2007. Its outlook for the metallurgical coals is similar, with semi-soft coking coal expected to decline from US$55/t this year to US$50/t next year and hard coking coal to fall from US$115/t to US$100/t in the same period.