13-06-2016

Coal Deals Start To Flow As The Price Recovery Accelerates

coal

It has to be the world’s least loved commodity but if that’s the case then why is the price of coal rising and, more to the point, why is someone about to spend more than $1 billion buying a suite of coal mines?

The answer is that loved, or unloved, the world simply cannot function without coal which is why the price of thermal coal which is used to generate electricity has risen by up to 15% since April, and why there are four bidders left in the race for two metallurgical, or steel-making, coal mines in Australia.

Potential buyers for the Moranbah North and Grosvenor mines being sold by the British-based mining conglomerate, Anglo American include commodities trader, Glencore, and AMCI, a coal specialist controlled by German billionaire, Hans Mende.

Selling To Retire Debt

The sale by Anglo American is part of that companies massive corporate clean-up which is designed to retire debt and leave it with far fewer assets that will be dominated by exposure to copper, platinum and the crown jewels in the form of the De Beers diamond business.

Getting out of coal had been expected to be a difficult process for Anglo American but the latest indications are that it might fetch as much as $1.4 billion from the two mines.

If a competitive bidding process for Anglo American’s Australian coal business isn’t seen as a convincing indication that coal is unlikely to disappear from the global economy any time soon then the rising price of thermal coal might do the job.

Life in Coal

What’s happening in the thermal coal market has started to attract the attention of some of the world’s leading investment banks with Morgan Stanley MS -1.73% noting yesterday: “There’s life in thermal coal”, and Macquarie Bank chiming in with a comment that: “Thermal coal on the counter attack”.

Because thermal coal is sold according to its heating value there is not a single price but as a guide the price for mid-ranking material shipped out of the Australian port of Newcastle is treated as a benchmark and over the past eight weeks it has risen from $50 a ton to $56/t, and higher in some cases.

Encouraging as the rise is for coal miners the price has a long way to go before reclaiming its high of around $120/t reached in early 2011.

No-one is expecting a rush back to that peak price, but there is also no clear explanation for the new-found interest in coal with suggestions being that it is simply floating higher in line with the rising price for oil, and that cutbacks in Chinese domestic coal output has boosted the seaborne coal market.

A Big Move By A Pedestrian Commodity

Morgan Stanley said that the recent rise in the price was “a big move for the huge, pedestrian seaborne thermal coal trade”.

“We’ve seen rallies of this scale and duration over the years, so why is this one surprising? Yes, such a lift might occur in November and December (pre-winter re-stocking), but not in the middle of the year when the trade is well supplied.”

In answer to its own questions Morgan Stanley suggests some of the increased activity is a result of China re-stocking and some due to the higher prices for oil and gas, along with weakness in the U.S. dollar.

China Coal Cuts Helping

Macquarie added two other possibilities, supply disruptions in Indonesia, and Chinese Government efforts to cut domestic coal production.

Whatever the explanation neither Morgan Stanley nor Macquarie believe that coal prices will continue to rise as supply meets demand and also because of a natural gas glut.

Then again, neither bank saw the rise coming which means clients missed some very handy share price moves such as an 80% jump by Australian-listed exporter Whitehaven Coal which has risen from 43c in early April to sales today at 78c.

Source: Forbes

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