The surge in coking coal prices to four-year highs has prompted analysts to upgrade earnings forecasts for some producers despite wariness about how long the upswing will last.
The price of coking coal, used to make steel, has more than doubled this year, touching $US200 a tonne on Friday, amid reports that South32, the spin-off from BHP Billiton, was forced to declare force majeure over supply difficulties at one of its mines in the Illawarra, coupled with supply disruptions at some Queensland mines
September and October are traditionally strong periods of demand in China as steel production is ramped up ahead of the year end, which has also spurred buying by some Chinese traders as stockpiles in Australia have reduced.
Just a week ago, the spot price for coking coal was holding at around $US155 a tonne, with the price up close to 50 per cent over the past month or so, underscoring the quick turnaround in the industry’s fortunes.
Also adding to the buyer rush to buy spot cargoes has been a run-down of inventories in China after government moves there to restrict coal output from unprofitable miners, although there was speculation of an easing of some restrictions late last week after the price spike.
Even though only small volumes of coal are traded through the spot market, the price surge is expected to feed through to higher contract prices after the next quarterly price reset, since most volumes traded are priced from quarter to quarter.
The contract price for most coking coal exports is around $US90 a tonne for most Australian shipments.
According to Deutsche Bank, a 10 per cent lift to the contract price at the next pricing reset would add 10 per cent to earnings before interest, tax, depreciation and amortisation (EBITDA) at South32 and 3 per cent to BHP Billiton’s earnings.
“We would not expect the full uplift in spot prices to be reflected in the next contract price as the weather-related issues impacting Australia’s supply have now diminished,” the investment bank told clients at the weekend.
There had been speculation the price surge would prompt the Chinese government to ease production controls. According to McCloskey Coal Report, an industry newsletter, the government has eased some production restrictions on its coalminers when domestic coal prices exceed certain levels.
It appears, however, that these changes may be mostly aimed at domestic users of steaming coal, which is mostly used to generate electricity.
The prime reason for the lift in coking coal prices has been the move to limit mine production to 276 days a year, down from 330 days.
It is believed production at South32′s Appin mine in the Illawarra was restricted due to roofing problems, prompting supply disruptions for a time.