Coal - where to now?

noirua said:

Most Aussie coal companies will give a quarterly report for their second quarter in the next 3 weeks and a half yearly report during February.

The quarterly report will give some clues as to how steep coal sales dropped off.

The other factor will show the extent of companies switching to thermal coal, if they can, and the extent of delays for PCI coal, semi-soft coke and semi-hard to hard coke.

The affect is expected to be dramatic on PCI and coke. But far less so on thermal coal, especially thermal sent in single ships, all from the same mine that is.

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Yes it will be good to see some of the results soon, and a few companies may surprise on the upside





thx

MS

Some are sitting with a P/E under 5 that have already re-affirmed their profit guidance You'd expect some reasonable falls in profit over the next year or two, but 50% is a little extreme..

To be honest I don't quite understand why many of the mainly Thermal producers are trading already as if their profits will halve.. many have contracted a lot of their production for 6-24 months at the old prices. This should keep profits at least reasonable, until the worst of this downturn has hopefully passed.

gfresh said:

Some are sitting with a P/E under 5 that have already re-affirmed their profit guidance You'd expect some reasonable falls in profit over the next year or two, but 50% is a little extreme..

To be honest I don't quite understand why many of the mainly Thermal producers are trading already as if their profits will halve.. many have contracted a lot of their production for 6-24 months at the old prices. This should keep profits at least reasonable, until the worst of this downturn has hopefully passed.

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Some of the coal mining stocks include profits from sales of assets in their profits for 2008. In the current year this opportunity is unlikely to be available. A few have quite heavy loan arrangements or commitments to explore or develop further mines.
There are additional concerns, that some mines may have to be mothballed or face a few lower cost open-cut mines coming onstream and pricing them out.
Many mining companies are having to delay shipments on requests or because the buyers bank cannot guarantee payment.

There are many mines where Chinese, South Korean and Japanese companies have stakes. In these cases there are coal agreements to purchase a certain amount of coal each year. These mines are safer than the ones that are 80% to 100% owned (excluding FLX's Moolarben project that has all coal for their open-cut mines sold for 25 years in advance).

Benchmark thermal coal prices out of Newcastle Port, spot for 3 months delivery:
22nd January - US$88.36
21st January - US$87.73
20th January - US$85.79
19th January - US$85.98
18th January - US$81.46

noirua said:

Benchmark thermal coal prices out of Newcastle Port, spot for 3 months delivery:
23rd January - US$88.19
22nd January - US$88.36
21st January - US$87.73
20th January - US$85.79
19th January - US$85.98
18th January - US$81.46

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Macquarie have down graded their Hard coking coal price to US$110 per tonne, down from highs of US$300 per tonne.

Forecast for thermal coal (6080 K/cal) is now US$75 per tonne agains a high of US$194 per tonne and last years Japan new year fix at US$125 per tonne.

Mixed blessings in this story. Positive is China power industry turning attention to Australian coal, negative is the weak electricity demand.
From today's China Daily...

China's major power generating companies are planning to buy more coal from overseas markets, as high domestic coal prices have cut their profit margins significantly.

The country's main power generators, including China Huaneng Group, China Datang Corp, China Guodian Corp, China Huadian Corp, China Power Investment Corp and China Resources Power Co, are contacting coal producers in other countries. They're planning to hold a conference for coal contracts after the Chinese Lunar New Year, celebrated on Jan 26, reported China Times, citing an executive with one power company.

"We are now talking with coal companies in Australia, Indonesia, Russia and Mongolia to secure stable coal supply," said the executive, who declined to be named.

In the first half of 2008, the sharp rise in domestic coal prices put many power companies into the red.

Xue Jing, director of the statistics department at the China Electricity Council, earlier told China Daily that China's power companies may incur 70 billion yuan losses in 2008 due to rising fuel costs and lackluster electricity demand.

"Although now the coal price has seen a sharp drop compared with last summer, we are still under big pressure," one source with China Huaneng Group told China Daily.

He said in past years Huaneng has imported some coal from foreign companies, but the amount was "not very big".

The company is now considering some investments in overseas coal mines, such as in Australia, he said.

To cope with the rising prices of raw material, Huaneng is eyeing abundant coal reserves in western China to increase its coal production, he said. For instance, the company plans to take part in some coal projects in Shaanxi, Ningxia and Xinjiang.

China's leading power companies have failed to reach an agreement with coal miners on coal supply contracts in 2009 as they are unwilling to concede to the miners' demands for higher prices.

Coal companies were set to sell 840 million tons to power producers at the annual coal contract negotiations. However, only about half of the coal offered by the miners was sold, said an official with China Coal Transport and Distribution Association, who declined to be named.


(China Daily 01/24/2009 page10)

Benchmark thermal coal out of the Newcastle Port fell on Monday to US$83.88 a tonne, down $4.33 since Friday.

Coal negotiations for the year starting 1st April 09 may be proving difficult and parties may fall inline with a 3 monthly agreement, similar to iron ore price discussions.

noirua said:

Benchmark thermal coal out of the Newcastle Port fell on Monday to US$83.88 a tonne, down $4.33 since Friday.

Coal negotiations for the year starting 1st April 09 may be proving difficult and parties may fall inline with a 3 monthly agreement, similar to iron ore price discussions.

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It will be interesting to see what happens from here







thx

MS

The outlook for Japan and China does now look quite serious. Many coal companies will get by just because of the tanking Aussie$ and hope it gets lower and lower.

Too many seem to be banking on a pickup in the second half of 2009 in the metallurgical coal market and getting by selling more thermal coal.
What if there is little improvement and signs of dumping coal by desperate companies?

Only those with good cash reserves and low cost open-cut mines are likely to do well if markets fail to improve.

Start Date End Date

ICE globalCOAL Newcastle Index
open methodology
globalCOAL Newcastle Index
The week-to-date and month-to-date index values are calculated by globalCOAL on each globalCOAL business day, full details on the methodology are available here.


close
ICE globalCOAL Newcastle Index
Date Week-To-Date Price Month-To-Date Price
January 26, 2009 83.88 82.83
January 27, 2009 83.63 82.78
January 28, 2009 83.25 82.71
January 29, 2009 82.94 82.64
January 30, 2009 83.15 82.69


The globalCOAL Newcastle Index values are calculated and supplied daily by globalCOAL. The Indices are a representation of week to date or month to date prices, calculated from the globalCOAL Newcastle Index traded on globalCoal, and are not calculated from futures activity traded on ICE.

A fall this week from US$83.15 a tonne to finish at US$78.17 per tonne, for thermal coal, spot, 3 months delivery out of Newcastle Port.

Feb. 5 (Bloomberg) -- Some power station coal producers from Australia have agreed contract prices with South Korean utilities, the Tex report said, without citing anyone.

Contract prices for six-month and one-year contracts were set at between $70 and $73 a metric ton, excluding freight costs, Tex said. Some South Korean utilities have modified contracts to start in January, April or August, similar to agreements reached by Japanese utilities, it said.

Thermal coal suppliers from Australia last year set contracts with Korean utilities at about $65, Tex said. Japanese buyers, which settled contracts later, paid $125 a ton, it said.

Annual price talks between Australian suppliers and Japanese utilities will start by the middle of this month, it said. Xstrata Plc, BHP Billiton Ltd. and Rio Tinto Group are among mining companies that ship thermal coal from Australia.

To contact the reporter on this story: Jesse Riseborough in Melbourne at jriseborough@bloomberg.net
Last Updated: February 4, 2009 17:26 EST

Bloomberg.comNEWS | MARKET DATA |

KOSPO and other Korean companies are reported to be tendering for (KOSPO tendering for 500,000 tonnes) thermal coal prior to discussions for price agreements starting shortly.
This tendering in advance may put pressure on agreements at lower levels from 1st April '09.
Prices were fixed at US$125 per tonne to 31st March '09.
Prices around US$75 per tonne are being paid, without shipping costs, as companies are making their own shipping arrangements.

As a guide line: Exchange rate was AU$1.07 approx on 1st April '08 and stands at AU$1.50 at 10th Feb '09, against the US$1.

US70-US80 is low but still profitable for our companies, reporting cost of production around AUD75.

If this is the low for the crisis then our producers will be fine, and if/when the recovery comes and the met coal demand picks back up there will be very large upside in the share prices imo.

I'm pretty sure oil has bottomed and hopefully coal too.

dirty_harry said:

US70-US80 is low but still profitable for our companies, reporting cost of production around AUD75.

If this is the low for the crisis then our producers will be fine, and if/when the recovery comes and the met coal demand picks back up there will be very large upside in the share prices imo.

I'm pretty sure oil has bottomed and hopefully coal too.

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Looking at reports in the States and Europe it does look as if oil and coal will stay under pressure. On the coal front the second stage of the coal price game is being played out right now, where customers try to fix orders at low prices before the official fix from 1st April '09.

If the oil price moves to US$30 per barrel then a thermal coal price between US$55 - US$60 per tonne could be the spot range by June '09.

Some mines will stay profitable at US$55 per tonne but the squeeze on some deeper mines may prove too much. Thus the third stage will begin.

Some low cost PCI and semi-soft coal producers, who are willing to sell their product as high value thermal coal, may drive some other mines to be mothballed.
Felix Resources very low cost thermal mine at Moolarben will eventually produce 13mtpa and later on 16mtpa and further exasperate a tight situation.

noirua said:

Looking at reports in the States and Europe it does look as if oil and coal will stay under pressure. On the coal front the second stage of the coal price game is being played out right now, where customers try to fix orders at low prices before the official fix from 1st April '09.

If the oil price moves to US$30 per barrel then a thermal coal price between US$55 - US$60 per tonne could be the spot range by June '09.

Some mines will stay profitable at US$55 per tonne but the squeeze on some deeper mines may prove too much. Thus the third stage will begin.

Some low cost PCI and semi-soft coal producers, who are willing to sell their product as high value thermal coal, may drive some other mines to be mothballed.
Felix Resources very low cost thermal mine at Moolarben will eventually produce 13mtpa and later on 16mtpa and further exasperate a tight situation.

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Yes interesting. The key I think is the met coal. Many shipments have been pushed back currently putting more pressure on the thermal market.

Interesting report by Arcelor Mittal. They say they expect steel shipments to increase in the second quarter, as inventories are running down at the moment. They stopped dead all coal shipments around October and since then have been running off inventories. Also they made a large writedown on their current coal contracts, ie they will still take the deliveries from companies like Macarthur who they have contracts with. They're just delayed for now.

Met Coal is Australia's largest export by a long way, then Iron Ore and Thermal Coal second and third. If the coal prices do tank for a long period, then it would be reasonable to expect the Aussie dollar to go lower offsetting some of the effect.

dirty_harry said:

Yes interesting. The key I think is the met coal. Many shipments have been pushed back currently putting more pressure on the thermal market.

Interesting report by Arcelor Mittal. They say they expect steel shipments to increase in the second quarter, as inventories are running down at the moment. They stopped dead all coal shipments around October and since then have been running off inventories. Also they made a large writedown on their current coal contracts, ie they will still take the deliveries from companies like Macarthur who they have contracts with. They're just delayed for now.

Met Coal is Australia's largest export by a long way, then Iron Ore and Thermal Coal second and third. If the coal prices do tank for a long period, then it would be reasonable to expect the Aussie dollar to go lower offsetting some of the effect.

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Quite a problem though if the Aussie$ strengthens and coal prices continue on down.
It looks as if China, Japan and South Korea are going to need between 30% and 40% less metallurgical coal this year. This means China may need no more metallurgical coal and will export thermal.

As you infer, companies must take metallurgical coal due under contract to 31st March. This should mean deliveries in April, May and June as companies are able to take it.
Looks horrendous for agreements from April 1st as most customers will be those with stakes in the mines, leaving others out in the cold.

noirua said:

Quite a problem though if the Aussie$ strengthens and coal prices continue on down.
It looks as if China, Japan and South Korea are going to need between 30% and 40% less metallurgical coal this year. This means China may need no more metallurgical coal and will export thermal.

As you infer, companies must take metallurgical coal due under contract to 31st March. This should mean deliveries in April, May and June as companies are able to take it.
Looks horrendous for agreements from April 1st as most customers will be those with stakes in the mines, leaving others out in the cold.

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Yes if the AUD does strengthen it will be a problem. It's possible, but if the value of coal exports plunge our balance of payments will blow out. State and Federal Government royalties will plunge creating budget deficits there too. This would be negative for AUD.

A couple of other points to think about:

- If you look at BHP's profits I think around a third is from coal. Then there is Iron Ore and Nickel, etc. So although it's diversified it's pretty well dependent on the Steel industry. BHP is down less than half but some of the pure coal companies are down 80%. So I see more value there.

- RIO, Macarthur etc have already cut production and made layoffs due to the downturn. If companies like Macarthur put themselves half to sleep (they can because they have no debt) until the recovery comes, then I'm happy to hold. Owning reserves in the ground is like holding Gold. No dividends but a good store of value.

- The Baltic Index is up from it's lows, so the recovery in Asia may be earlier than everyone thinks. If not then I'm patient. That's my opinion.

Newcastle Weekly Coal Exports Fall 25%; Queue of Ships Declines
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7LTaubPS6aY

Thermal coal spot prices continued to sink out of Newcastle Port. Price fell on Monday to US$73.38 a tonne down from US$78.64 a tonne on the 17/2/09.

1/4/2008 - Price fix for benchmark thermal was US$125 per tonne (AU$134 per tonne).
Spot 23/2/2009 was US$73.38 (AU$106 per tonne).