April 17, 2010
It is a dirty, abundant low-margin bulk commodity more usually associated with Britain’s industrial past — but coal is glowing hot again.
Look no further than the present $4 billion bid battle for Australia’s Macarthur Coal, which Xstrata is watching with interest. The FTSE 100 mining group has yet to declare its hand, but a two-way tussle between Peabody Energy of America and Australia’s New Hope has already forced Peabody to raise its offer 23 per cent above its opening salvo.
Then there is the 55 per cent price rise that BHP Billiton secured last month from Japanese steelmakers for shipments of coking coal — from $129 a tonne to $200 a tonne. Just as significant was the shift to shorter contract terms that accompanied it. Traditionally, miners and steel mills agree a price for the entire year. However, BHP has succeeded in moving to quarterly prices — giving it the flexibility to benefit from further expected rises in spot rates, and signalling that pricing power is now firmly in the hands of producers.
In confirmation, New World Resources, the London-listed Czech coal miner, this week announced much higher than expected prices with Japanese mills for its coking output, boosting its shares 21 per cent.
Further down the stock market, Phil Edmonds, the former England cricketer turned natural resources entrepreneur, is focusing on coal after selling his African copper interests to Kazakhstan’s ENRC. This week, Sable Mining, his latest AIM-listed vehicle, raised $125 million to develop a portfolio of coal assets in South Africa.
So why the sudden head of steam? At first sight, it might seem odd. As Tim Dudley, the mining analyst at Arbuthnot Securities, points out, coalmines are not goldmines: this is a volume business that traditionally operates at low levels of profitability. Further, coal is plentiful and under-utilised: at current rates of production, there is estimated to be over 150 years of recoverable coal reserves in the world.
Most immediately, prices have benefited from short-term disruptions to supply. Two months of exceptional rainfall in Queensland — the source of more than half the world’s seaborne coking coal — has caused flooding which has slowed or, in some cases, halted production. Cyclone damage to the Hay Point terminal of BHP-Mitsubishi Alliance, the world’s biggest exporter of coal for steelmaking, has caused further congestion.
But there are longer-term factors at work. Supplies from Queensland remain constrained by limited rail and port capacity, which, given the scale of the required infrastructural upgrades, will take several years to address.
On the demand side, a ramp-up in Chinese steel production has turned the country from an exporter to a net importer of coal. Whereas China has built up significant stocks of base metals, inventories of iron ore and coking coal remain tight. Further, Investec Securities cites the impact of the consolidation of China’s steel industry, which will lead to the use of larger blast furnaces, and a need for high-quality hard coking coal, which cannot be sourced domestically. In addition, demand continues to grow in India, which at present consumes less that 7 per cent of the world’s coal against China’s 41 per cent.
So how might investors play this global imbalance? Buying large-cap diversified miners with substantial coal interests, such as BHP, Rio Tinto, and Xstrata, might be considered unsatisfactory given their exposure to base metals with less favourable dynamics. One potential route is to back Britain’s domestic producers. This country consumes about 60 million tonnes of thermal coal a year to generate electricity but produces only 20 million itself. Not only should the handful of quoted local plays — UK Coal, ATH Resources, Energybuild and Hargreaves Services — increasingly benefit from the repricing of contracts towards international levels, but the weakness of sterling should favour their output against that of overseas rivals. Further, global economic recovery is likely to send shipping rates steadily higher, providing power stations with an additional incentive to buy British. However, the difficulty is that supply deals with generators are struck under long-term contracts, meaning higher prices will be slow to feed through. Recent operational difficulties at UK Coal and ATH might also give pause for thought.
The preference of Arbuthnot’s Mr Dudley is for producers of seaborne coking coal, which accounts for only 4 per cent of annual world coal production, and benefits from premium pricing. Mr Dudley believes the bid battle for Australia’s Macarthur highlights the move by producers of low-margin thermal coal — such as Peabody and Xstrata — to get their hands on scarce, higher-margin coking coal assets, and thinks further merger and acquisition activity will inevitably ensue. Among London-listed stocks, he picks out Western Coal, valued at £1.4 billion, which, after Macarthur, is the next biggest independent producer of the same type of metallurgical coal. Its assets are in Canada, rather than Australia, but, as its name implies, it is on the western side of the country, giving access to Asian markets. Unlike Australian rivals, it does not suffer from constraints in freight capacity. The drawback is that its shares have already more than doubled since February.
Mr Dudley also likes the small-cap Caledon Resources, which has been hurt by last year’s abandonment of bid talks and its imminent repayment of £18 million of convertible debt. However, its Minyango project sits in Australia’s Bowen Basin (the same territory in which Macarthur operates), 80 per cent of its output is coking coal, and it stands a reasonable chance of securing additional export capacity through Queensland’s newly expanded Wiggins Island terminal.
Source: http://business.timesonline.co.uk/tol/business/markets/article7100308.ece
It is a dirty, abundant low-margin bulk commodity more usually associated with Britain’s industrial past — but coal is glowing hot again.
Look no further than the present $4 billion bid battle for Australia’s Macarthur Coal, which Xstrata is watching with interest. The FTSE 100 mining group has yet to declare its hand, but a two-way tussle between Peabody Energy of America and Australia’s New Hope has already forced Peabody to raise its offer 23 per cent above its opening salvo.
Then there is the 55 per cent price rise that BHP Billiton secured last month from Japanese steelmakers for shipments of coking coal — from $129 a tonne to $200 a tonne. Just as significant was the shift to shorter contract terms that accompanied it. Traditionally, miners and steel mills agree a price for the entire year. However, BHP has succeeded in moving to quarterly prices — giving it the flexibility to benefit from further expected rises in spot rates, and signalling that pricing power is now firmly in the hands of producers.
In confirmation, New World Resources, the London-listed Czech coal miner, this week announced much higher than expected prices with Japanese mills for its coking output, boosting its shares 21 per cent.
Further down the stock market, Phil Edmonds, the former England cricketer turned natural resources entrepreneur, is focusing on coal after selling his African copper interests to Kazakhstan’s ENRC. This week, Sable Mining, his latest AIM-listed vehicle, raised $125 million to develop a portfolio of coal assets in South Africa.
So why the sudden head of steam? At first sight, it might seem odd. As Tim Dudley, the mining analyst at Arbuthnot Securities, points out, coalmines are not goldmines: this is a volume business that traditionally operates at low levels of profitability. Further, coal is plentiful and under-utilised: at current rates of production, there is estimated to be over 150 years of recoverable coal reserves in the world.
Most immediately, prices have benefited from short-term disruptions to supply. Two months of exceptional rainfall in Queensland — the source of more than half the world’s seaborne coking coal — has caused flooding which has slowed or, in some cases, halted production. Cyclone damage to the Hay Point terminal of BHP-Mitsubishi Alliance, the world’s biggest exporter of coal for steelmaking, has caused further congestion.
But there are longer-term factors at work. Supplies from Queensland remain constrained by limited rail and port capacity, which, given the scale of the required infrastructural upgrades, will take several years to address.
On the demand side, a ramp-up in Chinese steel production has turned the country from an exporter to a net importer of coal. Whereas China has built up significant stocks of base metals, inventories of iron ore and coking coal remain tight. Further, Investec Securities cites the impact of the consolidation of China’s steel industry, which will lead to the use of larger blast furnaces, and a need for high-quality hard coking coal, which cannot be sourced domestically. In addition, demand continues to grow in India, which at present consumes less that 7 per cent of the world’s coal against China’s 41 per cent.
So how might investors play this global imbalance? Buying large-cap diversified miners with substantial coal interests, such as BHP, Rio Tinto, and Xstrata, might be considered unsatisfactory given their exposure to base metals with less favourable dynamics. One potential route is to back Britain’s domestic producers. This country consumes about 60 million tonnes of thermal coal a year to generate electricity but produces only 20 million itself. Not only should the handful of quoted local plays — UK Coal, ATH Resources, Energybuild and Hargreaves Services — increasingly benefit from the repricing of contracts towards international levels, but the weakness of sterling should favour their output against that of overseas rivals. Further, global economic recovery is likely to send shipping rates steadily higher, providing power stations with an additional incentive to buy British. However, the difficulty is that supply deals with generators are struck under long-term contracts, meaning higher prices will be slow to feed through. Recent operational difficulties at UK Coal and ATH might also give pause for thought.
The preference of Arbuthnot’s Mr Dudley is for producers of seaborne coking coal, which accounts for only 4 per cent of annual world coal production, and benefits from premium pricing. Mr Dudley believes the bid battle for Australia’s Macarthur highlights the move by producers of low-margin thermal coal — such as Peabody and Xstrata — to get their hands on scarce, higher-margin coking coal assets, and thinks further merger and acquisition activity will inevitably ensue. Among London-listed stocks, he picks out Western Coal, valued at £1.4 billion, which, after Macarthur, is the next biggest independent producer of the same type of metallurgical coal. Its assets are in Canada, rather than Australia, but, as its name implies, it is on the western side of the country, giving access to Asian markets. Unlike Australian rivals, it does not suffer from constraints in freight capacity. The drawback is that its shares have already more than doubled since February.
Mr Dudley also likes the small-cap Caledon Resources, which has been hurt by last year’s abandonment of bid talks and its imminent repayment of £18 million of convertible debt. However, its Minyango project sits in Australia’s Bowen Basin (the same territory in which Macarthur operates), 80 per cent of its output is coking coal, and it stands a reasonable chance of securing additional export capacity through Queensland’s newly expanded Wiggins Island terminal.
Source: http://business.timesonline.co.uk/tol/business/markets/article7100308.ece
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