New King Coal

Coal is many things, but it’s definitely not sexy.

One of my mates read my most recent Diggers & Drillers newsletter, in which I took a look at metallurgical coal. All he could say was “Coal? It’s not exactly…” before I deftly turned the conversation back to the snags on the barbeque I was manning.

In the last three months I’ve written about platinum – the rarest of all precious metals; copper – the base metal of kings; and iron ore – Australia’s most valuable export. So maybe he was expecting something more glamorous this month.

But coal IS glamorous.

Particularly metallurgical coal, or ‘met coal’ to its mates. This is top quality coal with the highest carbon content. In terms of earning this country export dollars, it comes only just behind iron ore.

As well as this, Australia dominates met coal global trade supplying 64.9% of the seaborne market. And right now, the pricing system is having a once in a lifetime shake-up, which will mean better profits for producers in the future.

Coal’s future is burning bright.

The big producers are switching from an annual benchmark price system, which has been used as for as long as we have been exporting to Asia, to new flexible quarterly prices. These are much more likely to track the spot price which has recently become a much better indicator of coal’s true value.

But you don’t have to take my word for it. The latest commodity report from ABARE, the government’s commodity research body, forecast that met coal export prices will increase just shy of 30% this year.

But this is already looking a bit modest.

Now big players like BHP Billiton and X-Strata are doing deals with steel makers to sell top quality met coal at $200/tonne, which is an epic 55% jump on last year.

The government stats also forecast a 20% increase in the volume of Australian met coal exports over the next five years, from 150 million tonnes a year to 183 million tonnes a year, as the chart below shows.

Click to zoom in on World Metallurgical Coal Trade table

So where are these extra 33 million tonnes that it is so confident of going to come from?

About a third of it is accounted for in the notes, but buried deeper in the footnotes was a mention of how the company I tipped this month is likely to bridge a large part of the gap. This makes sense as it has Australia’s biggest met coal resource by a yard.

Another important thing this chart shows is that Indian met coal demand is the fastest of all countries, growing at an average of 13%. It will be the world’s biggest consumer well before the end of the decade at this rate.

This is a good thing for Diggers and Drillers readers as the company I tipped is strategically positioned to supply the Indian market.

With prices and export volumes rising, the whole coal sector is running hot at the moment. There have been plenty of mergers, acquisitions, and talk of takeover targets.

The Chinese bought Felix resources in December. And recently MacArthur made a bid to takeover Gloucester Coal. Then just this week, US company Peabody Energy made a takeover offer for MacArthur Coal. This offer gave our March recommendation a decent boost purely on the speculation that it could be a takeover target in the future as well.

Personally I don’t reckon it’s likely in the near future, and that our company has got a long way to go yet. One thing is for sure though. We can expect a lot of action in the coal sector, and I expect to write a lot more about it in the monthly and weekly issues of Diggers & Drillers.

Regards,

Dr. Alex Cowie
Editor, Diggers & Drillers
for Money Morning Australia

Tagged as: ABARE, bhp billiton, coal, commodity report, copper, Diggers and Drillers, iron ore, met coal, metallurgical coal, platinum, X-Strata