Coal Prices Forecasts Revised Higher

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This story features FELIX GROUP HOLDINGS LIMITED.
For more info SHARE ANALYSIS: FLX

By Chris Shaw

Recent supply side issues such as heavy rains in Indonesia, rail disruptions in South Africa and cuts to port allocations in Australia have lead to a significant tightening in global coal markets, setting the scene for price hikes as producers and buyers enter into annual contract negotiations.

Supporting the outlook for price hikes is a significant change in the Chinese market, as National Australia Bank minerals and energy economist Gerard Burg points out in the bank’s November coal outlook report. China is set to be a net exporter of just one million tonnes this year, well down from the 23 million tonnes in net exports it recorded in the first 10 months of 2006.

This trend is expected to continue, with Burg expecting China to become a net importer in 2008. While this in itself is enough to tighten global markets the other factor pushing spot prices higher of late and likely to push contract prices higher in upcoming negotiations is growing demand from India, Burg noting India’s annual consumption has been growing by around 5% over the past decade.

With the government planning to build seven coal-fired mega-power stations by 2012 that are intended to run on imported fuel Burg expects India’s thermal coal imports could increase by around 70 million tonnes in coming years.

For buyers the timing of the upcoming negotiations is not great as it comes when prices are already high, But Burg suggests there is likely to be some acceptance of higher prices as a consequence of assuring supply.

This is enough for him to revise up his price forecasts, a move matched this week by the coal analysts at brokers UBS and GSJB Were. Burg’s new forecasts call for JFY08 (Japanese Financial Year) thermal coal and semi-soft prices to increase by 40% this year against his previous forecast of a 10% increase, putting thermal coal prices at US$77.90 per tonne and semi-soft at US$89.50. For hard coking coal Burg now expects prices to rise by 33% to US$130 per tonne.

UBS’s new forecasts are even more aggressive as it has lifted its thermal price forecasts for JFY08 by 29% to US$90 per tonne, for JFY09 by 40% to US$105 per tonne and its long-term forecast by 37% to US$55 per tonne.

For hard coking coal the broker’s increases are 11% in JFY08 to US$145 per tonne and in JFY09 by 23% to US$135 per tonne, with its long-term price increasing 25% to US$75 per tonne.

GSJB Were’s changes are somewhat similar as it too has increased its JFY08 thermal coal forecast to US$90 per tonne, up from US$75 previously, while in JFY09 its forecast has risen to US$90 per tonne from US$65.

The broker’s hard coking coal revisions are slightly lower in magnitude in the coming year as it expects an increase to US$150 per tonne from US$140 previously, but in JFY09 it expects a significant increase to US$150 per tonne from US$110 previously. PCI estimates are now US$120 per tonne in JFY08 and US$112 per tonne for JFY09, up from US$95 and US80 per tonne respectively.

This has implications for stocks in the sector as UBS has upgraded a number of the coal stocks it covers on the back of higher expected earnings given likely higher coal prices. While Macarthur Coal ((MCC)) was already rated as a Buy the broker has lifted Centennial ((CEY)), Coal & Allied ((CNA)) and Gloucester ((GCL)) to Buys as well, up from Neutral, Sell and Neutral previously.

GSJB Were has reacted similarly, upgrading Centennial to Buy from Hold as on its revised numbers the stock’s effective P/E (price to earnings ratio) is attractive. As with UBS the broker already had Macarthur as a Buy, while it rates Felix Resources ((FLX)) as a Hold given it views the stock as fully priced at current levels.

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