Money Talks: Is this commodity the next one to take off?
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MoneyTalks is Stockhead’s regular recap of the ASX stocks and sectors that fund managers and analysts are looking at right now and in this edition we’re looking at a commodity that could be the next to take off.
Today we hear from Nic Bryon at APSEC Funds Management and he is a fan of thermal coal – which is used for generating electricity unlike metallurgical (or coking) coal which goes towards steel.
Thermal coal hasn’t been as hot with investors as copper or iron ore and unlike the latter has been affected by trade tensions with China – with an unofficial ban being imposed on Australian thermal coal.
But APSEC’s Nic Bryon says China is realising its own coal production cannot keep up with consumption and while there are other options for thermal coal, they just aren’t as high a grade as Australia.
“Their [China’s] electricity consumption is going gangbusters but the coal production is not keeping up with consumption,” Bryon said.
“Over past couple of months if you look at thermal coal futures index in China, at one stage you had coal at US$140 per tonne.
“Those prices are yet to be seen in Australia but other peculiar thing is these prices are set in January 2022 [which is] so much further ahead which you don’t generally see unless the participants in the futures market are expecting some sort of supply shock. In this case I think it’s more about that supply cannot keep up with demand.
“So the current period we’re going into, in the northern hemisphere it’s summer so you’ll have electricity ramping up due to air conditioning use, but in the case of the winter, it’s all about heating.”
What does this mean for producers in Australia?
Many of them bore the brunt of COVID-19 when thermal prices crashed but haven’t been recovering at the same pace as a takeoff occured in other commodities. But has thermal coal’s time come?
“Those equities have only really moved 10-20 per cent off the base. So if prices do recover and are more permanent than people think, those equities relating to thermal coal are likely to outperform in our view,” Bryon said.
“If you’re looking at copper stocks, the big diversifieds, the iron ore stocks, some of those [share] prices have started to roll.
“But from a perspective of them already being significant outperformers and finding thermal coal producers as significant laggards despite the price being so strong currently… the future view they could be stronger again in the next six months, I would’ve thought there could be some uplift to these names.
“With all those noise around green and socially responsible investing, maybe [there are] less investors in these types of names but it only takes a few instos to get behind the thematic – whether they’re coming from offshore or potentially here – for these equities to be repriced.”
APSEC’s stake in this company came from its former holding in Universal Coal (ASX:UNV) until Terracom took it over.
“That one’s quite interesting in the near term because they have a refi [refinancing] which they’ve openly disclosed will be done,” Bryon said.
“That could be an opportunity for reevaluation particularly if they can move the term [of bond maturity] five years out or thereabouts.
“The nitty gritty we don’t know but generally where there’s refi related to short term event, in their case debt rolled over by 30 June 2021, even for such short-dated debt structure generally you do get a bit of pop post-event.
“From my perspective that’s an important story they have to finalise but the real story is level of profitability of these companies that’ll come over the next six months while prices are elevated.”
While Bryon only named one individual thermal coal stock, he noted they were “all tied into the same thematic”.
“They’re all trying to find other homes for their supply that once went to China and that’s been driven by natural demand out of the consumers of that coal across Asia whether it’s Korea, Japan, probably to a lesser extent India as it generally comes from South Africa.
“But all those countries know that China is in short supply domestically and can’t ramp up production fact enough, Indonesia can’t supply enough – pretty much all that supply that would ordinarily go to China is going to be sought after by every man and his dog.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead.
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