Monsters of Rock: Analysts are tearing up coking coal forecasts as prices soar

Metallurgical coal prices in China have soared to record highs in recent weeks, in turn raising the floor for Australian product that has been directed to other markets since an unofficial ban started last year.

The self-destructive nature of China’s decision was laid bare by BHP recently in a market outlook, which described the Australia-China coal trade as the sun around which the solar system of the world’s heliocentric seaborne coal trade relied.

Without the benefit of this predictable supply and price-setting relationship China has been scraping for product elsewhere. Steelmakers have run into further roadblocks as Covid restrictions have shut the border between China and its biggest supplier Mongolia.

Australian producers are only getting a fraction of the surely unsustainable US$$414.55/t being paid for tight supplies in China. But the US$251.25/t quoted Tuesday by Fastmarkets for premium hard coking coal from Dalrymple Bay is nothing to sneeze at, and battered coal producers are now licking their lips at the prospect of elevated prices and returns between now and 2023.

RBC Capital Markets today updated its second half met coal forecast average from US$145/t to US$190/t.

Good news for holders of South32 (ASX:S32) and BHP (ASX:BHP) who should see an 8 and 2% increase to their 2021-22 earnings per share on RBC’s estimates as a result.

RBC analysts Kaan Peker and Paul Wiggers de Vries estimate average prices of US$200/t for Australian coking coal across the September Quarter, falling to US$180/t in the December Quarter, up US$60 and US$25 respectively.

They have kept the investment bank’s long-term post 2022 target of US$150/t, which is still pretty good going for most met coal producers.

Impacts on iron ore?

As iron ore prices have fallen from record highs, Fortescue Metals Group (ASX:FMG) has seen the return of significant grade discounts for its lower grade iron ore. Around 28-30% of that product RBC says is made up of a ~56% super special fines mix with high levels of impurities like alumina and silica.

After cutting its discount to 84% of the benchmark 62% fines price in the June Quarter, FMG has seen discounts blow out to more than 20% in August. There are additional concerns for lower grade iron ore producers, Peker and de Vries said, as lower grade ores require more of the increasingly pricey coking coal to produce crude steel in the blast furnace refining process.

“The met coal price impacts purchasing behaviors of steelmakers, especially iron ore. Over the last quarter, Chinese steel mills have become more concerned with coking coal prices; the ratio of HCC to iron ore prices has significantly increased and is now well above historic average,” they said.

“While met coal prices are one of many factors that drive the premium for the different ore products, we expect elevated Chinese met coal prices to benefit pellet and fines over lump, and be a detriment to low grade ore with higher impurities.

“We see risk that lower grade iron ore with higher impurities trade at a larger discount, and discounts remain elevated even if steel margins weaken.”

BHP is expected to be best off of the majors in this scenario, with the introduction of its South Flank mine meaning high grade lump now accounts for around 33% of its product mix, making it the largest lump producer in the world.

The Samarco JV with Vale in Brazil, which produces a premium grade product, is also ramping up years on from its tragic dam collapse.

Speaking of BHP and FMG, BHP returned fire in its battle with Twiggy over control of Noront Resources, noting the C$0.70 offer Forrest’s Wyloo Metals has made for the Canadian nickel explorer is not official.

BHP said it would waive standstill provisions in its confidentiality agreement to enable Wyloo to conduct due diligence and make a formal offer if it chooses, however the deal only requires 50% approval to go ahead, meaning BHP could wrest control of the company without Forrest’s 37.4% stake.

The materials sector was down close to 1% at 3.15pm AEST with the big iron ore miners all in the red.

PALADIN ENERGY (ASX:PDN)

Paladin was up 14.7% by 3.15pm AEST on no news as market conditions for uranium miners begin to improve.

The uranium spot price is up to its highest level in five years, with UxC showing the spot price up US$1.45 to US$33.75/lb as of August 30.

Uranium investors have become increasingly bullish in recent weeks and months as the price has risen along with a large campaign of physical uranium buying from the Sprott Physical Uranium Trust.

Paladin collapsed into administration when the market tumbled a few years ago but returned to trading after a recapitalisation and is now working on plans to reopen the Langer Heinrich mine in Namibia.