Can it last?
BHP calls the astonishing coal price recovery a “supply shock”
Wednesday 07 September 2016
Excited investors are finally cluing up to what is happening to coal prices and the cost of production, having invested heavily in the sector and sent the share price of some Central Queensland miners soaring.
Coal prices have risen beyond $195 a tonne, representing a 50 percent price increase in August alone and more than a 70 percent increase since the start of the year - leading BHP market analysts to talk about supply shocks for the first time since about 2007.
Notable among the miners is Stanmore Coal who claims to be the only listed “pure-play” metallurgical coal producer on the ASX after they recently spent more than $35 million acquiring and restarting the mothballed Isaac Plains mine south of Moranbah.
Over a four-day period starting on the 26th August, their share price increased 50 percent, and the volume of daily trades went from around 32,000 to nearly two million. Since then, their share price has inched higher another 5 percent.
In response to a query from the ASX regarding the rise, Company Secretary Andrew Roach said the move reflected the rising coal prices.
“Stanmore notes the coal market has strengthened considerably in recent months with the spot price of hard coking coal increasing 70% since the start of the calendar year to more than US$130 per metric tonne,” he said.
“Stanmore is the only pure-play coking coal producer listed on the ASX, and has considerable upside exposure to a rising coal price environment….and notes that a number of its peers also experienced share price gains in line with continued coal price strength.”
For BHP, every $13 per tonne increase in the average annual coking coal price, improves earnings by nearly $600 million. However, there are some question marks around the fundamentals driving the coal prices.
The August rally has been attributed to a decision by the Chinese Government to cut the number of days their local coal mines could operate by 15 percent, as well as some run-of-the-mill supply issues among Central Queensland coal miners.
According to BHP’s Singapore-based markets vice president Huw McKay, the combination of these factors has created a short-term supply shock, which won’t last.
“The price we’re surprised at, versus six months ago, is actually metallurgical (coking) coal,” he said
“We understand that what’s going on in met coal, very clearly, is a supply side shock.”
The underlying driver for metallurgical coal demand, however, is the production of steel, which has remained remarkably steady despite the worldwide economic slowdown.
However, that could all be about to change with the leaders of some of the world's biggest economies forming a group to monitor the world's biggest steel producer China.
The G20 group blamed China for a worldwide glut this week and have asked them to show evidence of their current plans to reduce steel output.
Prime Minister Malcolm Turnbull has called for caution, however, warning that large fast cuts to steel production in China would have dire implications for WA and QLD miners.