|Thermal Coal Prices to Climb Back—Eventually |
By ALEX MACDONALD
Wall Street Journal
July 3, 2012, 7:33 p.m. ET
A rout in thermal coal prices has left miners of the fuel looking cheap, particularly those that derive their profits from exports. But while analysts agree that the sector is due to rebound, they are divided on when that will happen.
A combination of weaker-than-expected demand from the world's two largest coal-consuming nations , clement winter weather and excess global supply has pulled the benchmark price of thermal coal, burned to generate electricity, down by more than 20% since the start of the year. Prices are now so low that the highest-cost producers are losing money.
Some miners are cutting output, but not all of the reductions have taken effect, and coal stocks in several regions are high.
The high stockpiles and the uncertain timing of the output cuts have clouded market predictions of when prices might begin to recover. Still, miners focused on exports—known in the industry as sea-borne coal producers—are better placed than those that focus on a single national market.
"The sea-borne coal producers have access to more markets in which to sell coal," said Tim Dudley, an equity analyst at the investment bank Canaccord Genuity.
Commodities analyst Mark Lewis at Deutsche Bank is among those who urge caution. "People are wary of calling anything too aggressively in the short term at the moment because so much depends on the [global] macro trend over the next two quarters," he said.
Two of the world's largest coal consumers have stockpiled large amounts of coal as coal-fired power generation has dropped.
China, the world's largest coal user, has seen consumption drop 2% in May from a year earlier as a result of slower economic growth. Heavy rains that have made it easier to generate hydroelectric power have allowed utilities to burn less fuel, analysts at Macquarie said.
In the U.S., the second-largest coal consumer, demand in the first quarter was 4.3% lower than a year earlier. Prices of natural gas have fallen as companies have tapped into vast reserves in beds of shale, making gas the preferred fuel for power generation.
At the same time, the supply of sea-borne thermal coal—an 800 million tons-per-year market—has risen. Indonesia, the world's largest thermal-coal exporter, has boosted shipments due to drier weather and fewer supply interruptions.
U.S. coal miners , while constrained by high rail-freight rates and limited capacity at ports, have also boosted exports in response to anemic demand at home.
As more coal has flowed into international markets, the price has fallen. The benchmark price for thermal coal exports from Newcastle, Australia, the world's biggest coal-export harbor, dropped to $85.90 a metric ton on June 15, below the $95 to $100 per ton it would cost the industry's least efficient miners to add another ton of output.
Since then, the Newcastle price has risen to $90.30 per ton, and some analysts say the sea-borne market may have found a floor.
"It's a reasonable argument to say they will go up in the short term," Nik Stanojevic, an analyst at independent U.K. private-wealth manager Brewin Dolphin, said of thermal-coal prices.
The recent price drop has ushered in production cutbacks, some of which have already been announced in the U.S. More reductions are likely to follow in Indonesia and Australia, Citigroup said in a note.
Macquarie said in a note that it expects prices to pick up in the fourth quarter as utilities rebuild their stockpiles for winter.
"To be clear, we are not forecasting prices to race back to $120-130/ton... but we do expect a solid base at $100/ton plus," buoyed by Chinese thermal coal-power generation, which should rise 10% to 20% from current levels even if overall power generation remains flat compared with last year, Macquarie said.
Mr. Dudley of Canaccord Genuity was more cautious, saying he wouldn't invest in thermal coal producers "until the Newcastle price elevates above $95" per ton.
UBS said it preferred coal producers such as Indonesia's PT Bukit Asam Tbk, which has the ability to expand production capacity as prices rebound, and Australia's Whitehaven Coal Ltd., which has declined a takeover offer by coal magnate Nathan Tinkler.
The mining house has set up an independent committee to respond if Mr. Tinkler raises his offer.