Bulk Buys: What is normal when it comes to coal?
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Is there any end to coal’s incredible price run in 2021?
This week has seen thermal coal prices rise to record levels, with low volatility 6000kcal product from Newcastle soaring 5% to US$240/t yesterday.
Twelve months ago, when China’s diplomatic retaliations against the Morrison Government took shape and Aussie coal was kicked out of China, it was barely fetching a quarter of that.
Chinese companies and state power organisations are so desperate for coal they’ve turned to new sources like Kazakhstan.
It is a bit of a last resort move. Best known for being lampooned by (now Perth) comedian Sasha Baron-Cohen in Borat, Kazakhstan is so far inland the coal is costly to export over rail.
It highlights the somewhat mad situation that has pushed power-starved China to a coal deficit that could hit 70-80Mt by the end of 2021 as winter approaches.
As prices supercharge in China, Australian producers are getting record revenues for each tonne they ship to markets which can’t afford to pay the prices China is offering for non-Australian coal.
“We estimate there could be a coal shortage in China of 70-80Mt by the end of 2021, assuming there is no material increase in production or additional power use intervention,” UBS analysts said in a note yesterday.
“We expect the government to prioritize residential heating demand during the winter and reports suggest authorities are ordering industry to cut output to reduce coal demand so that inventories can build ahead of winter.
“As a result, we expect overall industrial power usage to be cut 10-15% in Nov/Dec, translating to a 30% slowdown among energy-intensive industries (steel/non-ferrous/chemicals/cement) and a 5-10% slowdown among other general industrial activities.”
Production is expected to slow down in a host of sectors, coming on top of environment related steel refinery restrictions implemented in an effort to keep Chinese steel production flat year on year.
Coal miners are living in an unusual world.
On one hand, they face an existential threat from the global transition to renewable energy.
On the other hand, the nervousness around financing coal and other fossil fuel projects, as well as increasingly contentious approvals processes, have had an impact on supply, combining with supply chain challenges to support volatile price increases like we’re seeing at the moment.
Coal stocks, for a long time pariahs, are enjoying what is in recent times a rare day in the sun.
Yancoal (ASX:YAL) has posted no news since releasing its financial results on September 20, a $129 million loss.
It is now up 42% in the past week, and on the verge of breaking the $5 billion large cap barrier.
The rise of Owen Hegarty’s junior coal miner Tigers Realm Coal (ASX:TIG) has been even starker, up more than 70% for the week.
The small scale producer operates in Russia, meaning its coal can make it past the Great Wall, Covid restrictions permitting.
Tigers Realm lost $298,000 in the 2021 financial year, but it was selling its coal at a unit price of just US$65.07/t.
Do some quick maths on current coal prices and you can expect profits in the coming year.
The iron ore price began its slide from over US$200/t to current levels closer to US$115/t (and as low as US$93/t a fortnight ago) in August, as news of the slowdown in China’s steel output really started to emerge.
But that did not stop Australia from charging to a record trade surplus in August again at $15.1 billion.
Increasing receipts for LNG, thermal coal and met coal, and some residual iron ore price strength shielded Australia from what economists had projected would be a slide to a trade surplus of around US$10 billion.
August was the first monthly fall in a year for the RBA’s commodity price index, which was reweighted earlier this year to increase its exposure to iron ore.
The index dropped 6% in August before a 7% slide in September, reflecting the pull back in iron ore prices which shook a handful of high cost juniors out of the industry in recent weeks, with the suspension of projects owned by GWR Group (ASX:GWR), Mount Gibson Iron (ASX:MGX) and Venture Minerals (ASX:VMS).
There has been a slight rebound in recent days, attributed to restocking by steel mills in China ahead of the week-long Chinese National Day celebrations.
Steel margins are also strong, with prices in China and abroad at or around record levels, assisted by the output cuts.
The contraction in iron ore prices has opened up a new discussion about whether big miners like BHP, Rio and Fortescue are now oversold.
There are different perspectives on this. Market watchers who have spoken to Stockhead in recent weeks say they have become increasingly more interested in mining stocks as prices have fallen.
Bearish UBS yesterday said it was not buy time just yet.
“In general the miners are well positioned for a commodity price downturn with balance sheets strong, capex contained and capital discipline largely intact,” they said.
“However, with commodity prices falling and costs rising (energy, labour, consumables), the sector faces negative earnings
momentum, consensus earnings downgrades and lower cash returns with 1H21 the high watermark for earnings, FCF and dividends for most miners.
“Whilst the recent pullback may have unearthed long-term value in certain stocks, in our view it is too early to buy the miners.”
Labour impacts could be felt in another way for the Pilbara miners depending on how their workforce reacts to a new policy from the WA Government revealed yesterday that all employees in the state’s mines must be vaccinated.
Workers will need to have their first Covid vaccine dose by December 1 and their second by the start of 2022.
Miners have not received a promise from the state’s powerful Premier Mark McGowan that they will be able to operate in the event of an outbreak if they can achieve full vaccination rates. Rather the policy has been mooted as a way to try to protect nearby Aboriginal communities.
“This is about workers protecting themselves, their colleagues and their workplaces and communities they operate in,” Mines Minister Bill Johnston said.
“As an industry in WA, we pride ourselves on a range of factors including the health and safety of our workforce, and getting the COVID-19 vaccine is the next obvious critical element.”