After a dark winter for Canadian coal producers, spring supply contract negotiations halfway around the world are providing a glimmer of light at the end of the mine shaft. As news of the pricing agreement filtered through the market last week, Canadian coal stocks have reaped the benefits.
BHP Billiton Mitsubishi Alliance and Nippon Steel Corporation have reportedly settled on a price of US$128 tonnes to US$129 tonnes for coking coal for the 2009 Japanese fiscal year, which begins next month. That was far above the levels of less than $100 a tonnes that the market had feared early in the negotiations and even topped initial rumors of a $115 to $125 price settlement that leaked into the market last week.
While the result is less than half of fiscal 2008’s record price of $300 a tonne, it still points to one of the best years ever for coking coal prices and implies that Canadian coking coal producers could enjoy a better than expected year.
Daniel Brebner global mining analyst of UBS Securities said that “In our view, there is little other way to describe the outcome other than as a significant victory for mining companies. Despite one of the worst economic periods experienced in living memory, with considerable deflationary pressure, coking coal prices have been settled at their second highest level ever recorded in nominal terms.
Patricia Mohr vice president and commodities specialist at Bank of Nova Scotia said that the contract settlement suggests a price of about US$126 per tonnes to US$127 per tonne for Western Canada’s premium hard coking coal still above the peak of US$125 in 2005.” She said that “The price negotiated is lucrative compared with operating expenses.”
The improved pricing outlook prompted UBS’s MacArthur to raise his 12 month price target on Teck to USD$9 from USD$5 and ramp up his 2009 earnings forecast to USD$1.47 a share from 28 cents. Still, he cautioned that Teck’s debt problems remain a threat to the company. He said that “Even with the higher hard coking coal forecast, we believe that Teck will be challenged to meet its debt obligation without changes to operations, asset sales and/or other financing,” according to GlobeInvestor.
According to a report by Reuters, China’s top coal miner China’s Shenhua Group has struck a 5-year supply deal for 85 million tonnes of coal while rival China Coal has suspended a $2.5 billion project because of the global financial crisis. Shenhua has agreed to offer state-owned conglomerate China Resources Group 85 million tonnes of thermal coal over the next five years, the Xinhua news agency reported on Saturday, citing an agreement between the firms.
Both companies promised to keep the price “relatively stable” and company representatives at a signing ceremony in Hong Kong said the agreement signalled “a strategic draw” after years of pricing games between coal miners and power plants, Xinhua said. But with prices under pressure because of falling power demand, China’s No.2 coal miner China Coal Energy Co Ltd (1898.HK)said it was suspending a 17 billion yuan ($2.5 billion) project in Heilongjiang province.
China’s coal miners are struggling with a downturn in demand from power producers after years of raging growth in the sector. “The supply and demand of coal will become less balanced, coal prices will fall and the reform of value added tax and resource tax may affect the profitability of coal enterprises to a certain extent,” China Coal said in its 2008 results on Friday.
China’s top coal producing province, Shanxi, plans to shut 1,500 coal mines with less than 900,000 tonnes of annual production over the next two years, leaving around 1,000 mines in operation, Xinhua quoted provincial coal mining official Wang Chonglin as saying on Sunday. The miners have yet to lock China’s five big power generating firms into price agreements for 2009. The absence of a deal between miners and power groups has attracted imports in recent months, worsening the oversupply at home.
Chinaesteel reported that Qinhuangdao Port completed coal shipment of 10.34 million tons during the first 17 days of March up by 43.4 per cent month on month from the same period of last month at 7.21 million tonnes equal to 600,000 tonnes of outbound shipment per day up by 41 per cent from daily average of 424,000 tonnes in February.
As of March 18, there were 121 vessels waiting for coal loading in the port, compared to 99 on March 16th and 72 on February 15th. Experts say sharp increase in demand from the thermal power sector in the south is responsible for the rebound.
Brazilian mining company Vale has launched a $1.3 billion (£908.5m) coal mining project in Mozambique, the BBC reports. Vale is the world’s second-largest mining company and the largest producer of iron ore. The new plant is expected to produce 11 million tonnes of coal a year, to be exported to Brazil, Europe, Asia and the Middle East. It is thought Mozambique will now become the continent’s second-largest coal producer behind South Africa, which holds most of Africa’s reserves. Mozambique has attracted increasing numbers of foreign investors recently.
In total, the project is expected to generate 8.5 million tonnes of metallurgical coal, which is used for the production of steel. It will also produce 2.5 million tonnes of thermal coal, which is used for electricity generation, every year.
Mozambique’s president Armando Guebuza said: “We want these resources to continue contributing in a sustainable way to the improvement of the living conditions of our marvellous people.” The news is a boost for African commodities, which have been hit hard as consumers abroad continue to shun high-end purchases in the economic downturn. Commodity prices have also been badly affected by the reduction in demand from China, which once had an insatiable appetite for buying raw materials in order to fuel its now-fading economic boom. Countries such as South Africa, Congo and Botswana have particularly felt the effects of cooling trade in raw materials.
Japan-based Marubeni Corp. is to bid for the independent power producer (IPP) contracts of the 700-megawatt Pagbilao and 1,000-megawatt Sual coal plants the Power Sector Assets and Liabilities Management Corp. will bid out in May. Marubeni is bidding to be the administrators of the Pagbilao and Sual IPP contracts. Tokyo Electric Power Corp., which operates the Sual and Pagbilao, did not join them in bidding.
Marubeni is a major general trading house in Japan, which has been doing business in the Philippines for almost a hundred years with its investments in the power, telecommunications, construction, industrial parks, food-processing and general-merchandise sectors.