Monsters of Rock: Coal rush has a while to run yet, UBS
China’s decision to shut Aussie coal out last year seemed like a kiss of death for the Australian industry, but pandemic supply chains work in funny ways.
Despite domestic met coal cargoes climbing over US$600/t in the supply constrained Chinese market and Australian exports to non-Chinese markets rising above US$400/t, UBS analyst Lachlan Shaw told a media roundtable today China showed no signs of letting up its ban on Aussie rock.
“We have record high met coal prices, very strong to record high thermal coal prices, (and) there’s no evidence in front of us of any potential change in the trade situation between China and Australia,” he said.
“Certainly channel checks from colleagues in China and industry in China aligns with that view.
“Now, that may change. But for now … China is managing record high coal prices right now and there’s no sign of change. The stress from that, what they’re paying for coal, has never been higher, and there’s no indication of a change in stance.”
Shaw believes coal prices will return to some degree of normality next year as demand from the steel sector drops off, a factor already seen in the 60% dive in iron ore prices brought about over the past four months from steel production cuts in China.
But margins will remain strong for Australian miners, with 18 months of extremely high prices ahead for both coking and thermal coal.
“The normalisation of China’s overall coal market could take up to a couple of years from the current very tight situation,” Shaw said. “So that leaves us expecting the met coal price to fall back towards more normal levels around US$150/t or thereabouts by 2023.
“So very high prices today, but still healthy prices through much of next year.
“Thermal coal, again, record high prices correlating through to very high gas prices in North Asia and Europe as consumers restock ahead of winter.
“Again, tight supply demand for thermal coal inside China. We anticipate that situation to remain tight through northern hemisphere winter and then start to ease moving for next year.
“But we don’t currently see thermal coal prices normalising for probably 18 months.”
A more than 6.5% gain dragged Whitehaven’s market cap past $3b. Its stock has tripled in the past year.
As it came out the other end of China’s Mid-Autumn Festival iron ore posted its strongest gain in weeks overnight, climbing 14.4% or US$13.55/t to US$107.55/t.
It will bring at least momentary relief for investors in the big miners, with Dalian futures for January delivery up again in afternoon trade today.
Analysts have suggested restocking ahead of the Chinese National Day holiday is a major factor as well as a stay of execution for China’s debt-ridden Evergrande property group, which yesterday said it would make a scheduled bond payment this week.
Steel rebar futures are also approaching May highs.
“Property accounts for 25‑30% of China’s steel demand. Yet the rise in steel rebar futures since mid‑August, especially the last week, suggests that these steel demand concerns aren’t as pressing,” Commbank’s Vivek Dhar said in a note.
“Steel rebar futures are now just ~2% below peaks reached in mid‑May. Steel rebar is used predominantly in construction.
“The rise in steel rebar futures highlights that China’s steel production cuts are having an outsized impact on China’s steel market. In our view, these cuts remain the key risk to further drops in iron ore prices.”
Dhar said “it was hard to see iron ore prices find support above US$100/t” with the CBA expecting prices to fall gradually to US$65/t by 2024.
Predictions on both ends of the scale have been fraught with risk this year, however, with prices soaring unexpectedly to more than US$230/t earlier in 2021 before their dramatic retrace.