Monsters of Rock: End to China coal ban still just hype as Coronado and Yancoal report
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US-Australian coal miner Coronado Global Resources (ASX:CRN) says investors should not expect the reopening of the coal trade between Australia and China to cause massive shifts in market dynamics.
The coking coal miner is one of the few ASX-listed stocks selling into the world’s biggest steel market right now, thanks to its US production arm.
While thermal coal continues to demand a massive premium at near record prices of US$408.60/t thanks to a shortage of energy resources across the world, the typically more expensive metallurgical coal out of Australia is trading for a softer US$241/t.
It has been suggested China’s need for met coal and desire to cut input costs in its currently stressed steel sector will see support for Australian met coal prices, which are cheaper than domestic prices.
Coronado CFO Gerhard Ziems warned the reversal of the ban remained in the realm of speculation, despite commentary getting hotter in recent weeks.
“If they open the gates to Australian met coal, what you would see is these arbitrages disappear, you know, you see prices converging, the CFR comes down and the benchmark probably goes up a little bit in the short term,” he said.
“But, the fact of the matter is, despite all the media coverage, there’s actually no substance to it at this stage.
“We hear that there’s not really any official decision made. The logic is that the biggest steel producer on the planet should deal logically with the biggest met coal producer on the planet and that will happen at some stage.
“I can’t see that happening before quarter four this year, at best, you know, but at the moment this is all media talk and no substance behind it.”
Ziems thinks the impact of reopening the trade route would only be temporary, while they will have little impact on thermal coal, a market China can service from its own domestic production.
“Overall for the industry I think it will be in the short term a positive impact, simply because of price convergence, but then the normal market dynamics come into play and you see prices developing as they would,” he said.
After Whitehaven Coal (ASX:WHC) revealed a staggering 15x rise in earnings to $3 billion earlier this week, coal investors would have been watching other coal stocks’ production reports closely.
Coronado was hammered though, with a big 18% drop in production due to rain in the Bowen Basin to 5.5Mt and 22.5% fall in saleable production to 3.3Mt.
CRN says it is likely to only hit the lower end of its 18-19Mt guidance range, with costs also lifting to US$79-81/t.
Primarily a met coal producer, CRN has also seen its product prices fall across the quarter while the more thermal exposed Whitehaven is still enjoying near record unit sales.
CRN’s average coal sale price increased 20.5% on the March quarter to US$321.2/t, but sales dropped 9.9% to 3.9Mt, while met coal prices have fallen well below those levels in the past few weeks as steel demand has looked shaky.
On a commercial level though prices are still supporting bumper revenues.
CRN made a record US$1.033 billion in revenue in the June quarter, up 9% on the previous record of US$947m in the March quarter, with group revenue of US$1.98b for the first half a 147% boost on the same period in 2021.
It closed the half year with US$486m in cash (net US$171m) despite capx of US$91.5m and dividend payments of US$351m in April and June.
Fellow coal miner Yancoal (ASX:YAL) meanwhile pumped out a head-turning $1.8b in cash in the June quarter on 7.9Mt of coal sales and 12.5Mt of (100% basis) ROM coal production.
Prices of $368/t helped boost its bank balance to $3.4b even after the payment of a $930m dividend, enabling a $1.14b debt repayment to become debt free in July.
There were some negatives, with wet weather, diesel costs and Covid cases forcing downward revisions to Yancoal’s outlook.
The miner will produce 31-33Mt of saleable attributable coal output in 2022 at cash operating costs of $84-89/t.
“Like much of the industry, flooding rain and COVID-19 impacted Yancoal’s output during the June quarter. The operations teams are doing an excellent job of revising and implementing recovery plans,” CEO David Moult said.
“However, we cannot recoup all the lost production. Our production and operating cost guidance is revised accordingly.
“Yancoal’s lost output is part of the sector-wide supply-side disruptions that, along with global energy uncertainty, continues to underpin prices in the international coal markets. While there may be price volatility, we anticipate coal prices to remain well supported through the end of the year.”
Experts back that outlook as well.
ANZ Research’s Daniel Hynes and Soni Kumari said in a note to clients that while global coal use for energy peaked in 2021, mined coal output remains below record levels seen a decade ago, placing strain on supplies.
“Coal supply growth however is muted. Global mine production is below the record high in 2012 of 8256mt,” they said.
“In fact, growth per year over the past decade has averaged only 0.3%. And the big exporters – South Africa, Indonesia and Australia – will not be able to lift supply in the short term.
“Consequently, upward pressure on coal and electricity prices will continue over the next 6-12 months.”