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Bulk Buys: Coal, the cat of commodities, could have yet another life; and how consensus is stooging the big miners
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- Thermal and Met Coal prices could run higher again on rebounding Indian and Chinese demand, says S&P
- The dirty fuel with nine lives is the only major commodity alongside gold to get a forecast upgrade from the ratings agency
- Strong iron ore prices could see FMG’s FY24 earnings beat Bloomberg consensus by 84%
Coal prices have tumbled heavily this year so far, with week demand in Europe where gas stocks have been overstuffed for much of 2023 after a mild winter helping knock prices down from last year’s record highs.
But they are far from dead.
Coal demand, thought by many analysts to have peaked almost a decade ago, is set to remain around record highs according to the International Energy Agency in 2023, climate change be damned.
Consumption of the filthy stuff rose 3.3% to 8.3Bt last year — yeah, that’s a B for billion — with first half consumption up 1.5% to 4.7Bt as a 5% lift in demand across China and India cancelled out big drops in the US and Europe.
Now import demand is ramping up from China and India again, with S&P Global Ratings making thermal and metallurgical coal the only major commodities along with gold it lifted price forecasts for in its latest update this week.
Thermal coal is now forecast to hit an average price of US$150/t for 2023, though its 2024 and 2025 price assumptions remain challenging at US$110/t and US$90/t, the latter below the cost base of many Hunter Valley operations.
For metallurgical coal, used in steelmaking, S&P’s price assumptions have risen from US$250/t for 2023 to US$280/t, with 2024 forecasts up from US$190/t to US$220/t and 2025 levels unchanged at US$160/t.
By contrast S&P kept its price forecasts for iron ore and zinc unchanged and lowered expectations this year for nickel, for both 2023 and 2024 for aluminium and 2023-2025 for copper.
Demand strengthening
While big surpluses are emerging in what were previously exciting base and battery metals markets, coal is beginning to look a little short-changed.
“We raised our assumptions for the rest of 2023 as demand for Newcastle Australia thermal coal appears to be strengthening in the fourth quarter,” S&P says.
“We expect import demand from India to pick up during the post-monsoon and pre-festival season. Also, China should import more while there are tightened safety inspections in its main coal mining provinces after accidents.
“Korea state-owned power generations companies may return to Australian thermal coal to limit trade with Russia.
“Competition from Russian and South African coal have exerted downward pressure on coal prices since 2022, but discounts in Russia are vanishing and its exports started to fall from May 2023 with less imports from India and South Korea.”
S&P continues to see challenges as supply rebalances and decarbonisation policies ‘gain traction’ from the middle of the decade, expecting demand in China, India and Southeast Asia to peak and the US and Europe to keep contracting.
Who would bet against a cat with nine lives though?
And steelmaking coal?
On the met coal front, the World Steel Association sees steel demand growing 1.8% worldwide this year and 1.9% to 1.85Mt in 2024.
That is keeping demand for met coal higher for longer.
S&P said a rebound in Indian steel demand and tight domestic supply in China where there has been a mine safety crackdown informed its decision to lift 2023 and 2024 assumptions of the premium product by 10-15%.
“India’s steel output remained well supported by increasing demand from the infrastructure and auto sectors, and rose 15% year on year in July-August,” S&P noted.
“We expect this momentum to continue as the government expedites ongoing infrastructure projects ahead of the general elections in April-May 2024. We assume global steel output growth of about 2% in 2024 and 2025, mostly from markets excluding China, with India accounting for the bulk.
“India is set to add 15 million tons of steel capacity next year as domestic demand likely increases 8%-10% on higher infrastructure spending. This should support prices as India accounts for about a quarter of global seaborne trade.
“That said, we maintain our view that prices decline toward market-clearing cash costs in 2025, consistent with our approach for most metal price assumptions. Unexpected supply disruptions around the world have often raised prices higher than we assume for steelmaking bulk commodities such as metallurgical coal and iron ore.”
ASX coal stocks
Scroll or swipe to reveal table. Click headings to sort.
| CODE | COMPANY | PRICE | WEEK RETURN % | MONTH RETURN % | 6 MONTH RETURN % | YEAR RETURN % | MARKET CAP |
|---|---|---|---|---|---|---|---|
| NAE | New Age Exploration | 0.006 | 0% | -25% | 20% | -25% | $ 9,866,444.01 |
| CKA | Cokal Ltd | 0.11 | -4% | 5% | -31% | -50% | $ 118,684,387.80 |
| BCB | Bowen Coal Limited | 0.105 | -9% | -25% | -59% | -72% | $ 221,324,898.90 |
| SVG | Savannah Goldfields | 0.065 | 3% | -7% | -61% | -68% | $ 13,028,614.76 |
| GRX | Greenx Metals Ltd | 0.955 | 6% | 7% | 24% | 267% | $ 260,599,386.75 |
| AKM | Aspire Mining Ltd | 0.077 | -5% | -18% | 28% | -18% | $ 38,072,773.88 |
| AVM | Advance Metals Ltd | 0.005 | 0% | 0% | -44% | -62% | $ 2,942,793.63 |
| YAL | Yancoal Aust Ltd | 5.07 | 0% | 0% | -13% | -16% | $ 6,668,219,156.85 |
| NHC | New Hope Corporation | 6.36 | 3% | 2% | 10% | -7% | $ 5,427,053,678.88 |
| TIG | Tigers Realm Coal | 0.0055 | 0% | -8% | -56% | -63% | $ 65,333,511.84 |
| SMR | Stanmore Resources | 3.67 | 3% | 12% | 12% | 36% | $ 3,389,232,543.84 |
| WHC | Whitehaven Coal | 6.79 | 3% | 2% | -1% | -37% | $ 5,672,153,315.52 |
| BRL | Bathurst Res Ltd. | 0.98 | -3% | 0% | -6% | 6% | $ 187,532,584.40 |
| CRN | Coronado Global Res | 1.71 | 0% | -4% | 5% | -9% | $ 2,858,353,609.65 |
| JAL | Jameson Resources | 0.051 | 0% | 0% | -35% | -27% | $ 19,967,066.10 |
| TER | Terracom Ltd | 0.425 | 2% | -11% | -36% | -60% | $ 336,405,818.70 |
| ATU | Atrum Coal Ltd | 0.005 | 0% | 0% | 0% | -44% | $ 6,958,495.86 |
| MCM | Mc Mining Ltd | 0.105 | 17% | -22% | -34% | -59% | $ 41,964,846.21 |
| DBI | Dalrymple Bay | 2.75 | 0% | 0% | 1% | 19% | $ 1,368,302,200.92 |
| AQC | Auspaccoal Ltd | 0.125 | -4% | 0% | -22% | -60% | $ 57,002,893.00 |
Iron ore miners poised to outperform consensus: JPMorgan
Consensus, especially around pricing is all a bit controversial.
Pricing commodities years out is a very difficult task, especially when policy and international events are difficult to predict years out.
Who could have foreseen Covid, or Russia’s invasion of Ukraine, for instance, or the impact of the rise of shareholder activism against fossil fuels?
For analysts, governments and more it can pay to be bearish, a surprise to the upside is far more preferable to a surprise to the downside, especially when prices of bulk commodities can be, as seen in recent years, highly volatile.
However, the continued strength of the iron ore price against analyst expectations and logic surrounding the Chinese property market has put the cat very much among the pigeons for forecasters.
JPMorgan has run the numbers and found a stunning gap for a string of miners against Bloomberg consensus FY24 EBITDA.
Leading the lot is Fortescue (ASX:FMG), which at spot prices could outperform’s Bloomberg’s 2024 EBITDA consensus estimate by a whopping 84%.
That is down to its revenue being pretty much entirely tied at the moment to iron ore prices, currently trading at around US$117/t for 62% Fe benchmark product.
While Fortescue sells a lower grade hematite, its realisations have been strong since low profit margins at Chinese steel mills have led to a shift to discounted sub-grade iron ore.
RIO (ASX:RIO), BHP (ASX:BHP) and FMG are among JP’s preferred Aussie large cap on valuation. BHP and Rio, which report their September results this morning and yesterday, respectively, are 25% above consensus on spot, JPMorgan reckons.
Among the overhangs on Fortescue has been the carousel of executive churn, including the sudden departure of metals CEO Fiona Hick and CFO Christine Morris.
Reports suggested the departures came amid misalignment between the key executives and executive chairman, billionaire major shareholder and founder Andrew Forrest’s determination to decarbonise FMG’s Pilbara operations by 2030 in a US$6.2 billion drive to hit what he calls “Real Zero”.
Onsite yesterday new CEO Dino Otranto, previously the miner’s COO, painted a portrait of evangelical commitment to the process as he led media on a tour of FMG’s Pilbara operations. Chief among investors and analyst visits have been a pilot battery electric haul truck, currently running at four hours’ charge load free in a test pit.
FMG is planning to have green truck operational onsite by 2026.
Otranto said he hadn’t observed tensions with former CEO Hick and FMG’s decarbonisation mission, but said the plan was ‘gaining more momentum’.
“I think what you’ve what you’ve evidenced today is a bit more concrete footsteps now on our path to real zero,” he said,
“So, certainly the plan which we announced just over a year ago, our costed plan to decarbonise our terrestrial operations, is now gaining a lot more momentum, a lot more confidence by everybody that we can achieve that and the trucks that you saw today will actually have a delivery date prior to 2030.
“So in some respects we’re a bit ahead of the game already.”
FMG submitted plans early last year to construct a massive 5.4GW renewable energy hub powered by wind, solar and battery storage, and is also progressing plans to become a major green hydrogen producer as the industry becomes commercially viable via its Fortescue Future Industries arm.
What’s driving the outperformance in iron ore?ASX iron ore stocks
Scroll or swipe to reveal table. Click headings to sort.
| CODE | COMPANY | PRICE | WEEK RETURN % | MONTH RETURN % | 6 MONTH RETURN % | YEAR RETURN % | MARKET CAP |
|---|---|---|---|---|---|---|---|
| ACS | Accent Resources NL | 0.008 | 0% | 0% | 14% | -68% | $ 3,785,018.26 |
| ADY | Admiralty Resources. | 0.006 | 20% | 0% | -14% | 0% | $ 7,821,474.92 |
| AKO | Akora Resources | 0.15 | 3% | -6% | -17% | -23% | $ 13,297,593.96 |
| BCK | Brockman Mining Ltd | 0.025 | -7% | 14% | -17% | 0% | $ 232,005,803.28 |
| BHP | BHP Group Limited | 45.57 | 3% | 0% | -2% | 14% | $ 229,005,663,576.66 |
| CIA | Champion Iron Ltd | 6.24 | 4% | -6% | -11% | 26% | $ 3,165,849,898.20 |
| CZR | CZR Resources Ltd | 0.19 | 41% | 36% | 9% | -20% | $ 41,253,563.05 |
| DRE | Dreadnought Resources Ltd | 0.044 | -2% | -20% | -42% | -54% | $ 154,961,259.12 |
| EFE | Eastern Resources | 0.009 | -10% | 13% | -18% | -79% | $ 11,177,518.15 |
| CUF | Cufe Ltd | 0.012 | -8% | -14% | -20% | -20% | $ 13,753,348.38 |
| FEX | Fenix Resources Ltd | 0.225 | 0% | -4% | -6% | -10% | $ 149,244,812.80 |
| FMG | Fortescue Metals Grp | 21.83 | 6% | 3% | -3% | 28% | $ 66,320,904,333.72 |
| RHK | Red Hawk Mining Ltd | 0.6 | -12% | -15% | 43% | 0% | $ 106,374,603.51 |
| GEN | Genmin | 0.18 | 0% | 0% | 0% | -12% | $ 81,275,982.12 |
| GRR | Grange Resources. | 0.445 | 0% | -7% | -36% | -43% | $ 491,868,946.65 |
| GWR | GWR Group Ltd | 0.075 | 4% | -19% | -11% | 17% | $ 24,091,249.13 |
| HAV | Havilah Resources | 0.24 | 0% | 0% | -21% | -24% | $ 75,993,410.40 |
| HAW | Hawthorn Resources | 0.091 | -9% | -27% | 30% | 2% | $ 30,486,420.78 |
| HIO | Hawsons Iron Ltd | 0.048 | -6% | 30% | -21% | -87% | $ 44,115,410.83 |
| IRD | Iron Road Ltd | 0.074 | -11% | -8% | -30% | -47% | $ 64,795,876.79 |
| JNO | Juno | 0.08 | 3% | 8% | -18% | -19% | $ 10,852,640.08 |
| LCY | Legacy Iron Ore | 0.018 | -5% | 20% | 20% | 0% | $ 115,322,871.58 |
| MAG | Magmatic Resrce Ltd | 0.06 | 0% | 11% | -50% | -48% | $ 18,341,567.88 |
| MDX | Mindax Limited | 0.056 | 8% | 12% | -78% | -5% | $ 114,551,291.68 |
| MGT | Magnetite Mines | 0.45 | 55% | 22% | -22% | -63% | $ 30,706,019.60 |
| MGU | Magnum Mining & Exp | 0.024 | -4% | -25% | 20% | -40% | $ 20,900,396.48 |
| MGX | Mount Gibson Iron | 0.45 | 5% | -3% | -13% | 14% | $ 534,344,506.52 |
| MIN | Mineral Resources. | 63.49 | 7% | -11% | -20% | -11% | $ 12,156,210,735.84 |
| MIO | Macarthur Minerals | 0.195 | 15% | -3% | 44% | 44% | $ 32,380,430.16 |
| PFE | Panteraminerals | 0.062 | 11% | 22% | -31% | -41% | $ 5,489,472.13 |
| PLG | Pearlgullironlimited | 0.028 | 8% | 12% | -30% | 28% | $ 5,727,170.12 |
| RHI | Red Hill Minerals | 4.45 | 1% | 5% | -5% | 31% | $ 287,226,670.50 |
| RIO | Rio Tinto Limited | 117.11 | 3% | -2% | -3% | 21% | $ 42,957,140,284.08 |
| RLC | Reedy Lagoon Corp. | 0.006 | 0% | 20% | -12% | -52% | $ 3,700,101.53 |
| CTN | Catalina Resources | 0.003 | -25% | -25% | -40% | -63% | $ 4,953,947.57 |
| SRK | Strike Resources | 0.054 | -4% | -10% | -5% | -44% | $ 14,187,500.00 |
| SRN | Surefire Rescs NL | 0.013 | -7% | -13% | -41% | 0% | $ 21,467,725.20 |
| TI1 | Tombador Iron | 0.014 | 0% | -30% | -39% | -42% | $ 30,218,753.22 |
| TLM | Talisman Mining | 0.14 | 12% | 0% | 0% | 0% | $ 26,364,848.86 |
| VMS | Venture Minerals | 0.01 | 0% | -17% | -47% | -60% | $ 17,550,117.32 |
| EQN | Equinoxresources | 0.17 | -6% | 3% | 6% | 26% | $ 16,235,000.51 |
| AMD | Arrow Minerals | 0.002 | -20% | -33% | -56% | -60% | $ 6,047,530.19 |
