Coking coal price surge to boost export earnings
Surging coal prices could add $US25 billion to export earnings if the dramatic rise is sustained.
Surging coal prices could provide a $US25 billion boost to the nation’s export earnings and beat federal and Queensland budget expectations by more than $4bn, if a dramatic rise in the price of coking coal can be sustained through the financial year.
Miners, steel mills and traders have been shocked by a 123 per cent rise in the spot price of coking coal, Australia’s second-biggest export after iron ore, to a four-year high of $US206.40 a tonne, as China restricts coal production to curb oversupply and steel demand remains strong.
The Australian premium coking coal spot price, for which Treasury had factored in a $US91 per tonne average in this year’s budget, has not had a negative session since August 2.
“Chinese mills are in a coal panic,” Credit Suisse analyst Matthew Hope said yesterday.
“With no supply relief in sight (from domestic mines), China steel mills have capitulated and begun to buy pricey seaborne metallurgical coal (after earlier refusing to buy imports above $US170 a tonne).”
The supply situation tightened late last week when China’s powerful National Development Reform Commission ignored a request from the China Iron and Steel Association to relax restrictions on Chinese domestic coking coal supply.
Instead, it allowed some thermal coal mines to temporarily produce beyond the restricted 276 days of annual production it put in place in April.
“The outlook for metallurgical coal looks extremely positive,” Macquarie analysts said in a note to clients after surveying coal traders.
“Belief was widespread that China would do little to stop metallurgical coal price rises due to the lack of supply-side reforms enacted by steelmakers.”
The price rise will be reflected in quarterly contract negotiations for the December quarter, with traders expecting prices to double to $US180 a tonne.
Coking coal is higher quality than the thermal coal used in power stations. With a less plentiful global supply of premium coking coal needed by steel mills, its price is much more sensitive to supply restrictions.
Prices of thermal coal, Australia’s third-biggest export by value, are up 30 per cent this financial year to an 18-month high of $US70 a tonne, which will also add to government coffers.
Australia is expected to export 187 million tonnes of coking coal and 206 million tonnes of thermal coal this year, according to HSBC’s local chief economist Paul Bloxham.
“If the full rise in the coking coal and thermal spot price were to flow through to Australian export prices, it could boost export values by $US25bn, which is a whopping 2 per cent of nominal GDP,” Mr Bloxham said.
“The rise in coal prices is certainly welcome for producers, as many Australian producers have been facing cash losses in recent times, as many of them are at the high end of the cost curve, particularly for thermal coal.”
Most of the nation’s coking coal comes from Queensland, which produces about 120 million tonnes of premium coking coal a year. BHP Billiton mines more than half of this through its 50-50 BHP-Mitsubishi Alliance.
Queensland’s latest budget, handed down in June, forecasts coking coal prices of $US88 and thermal coal prices of $US60.
Every 1 per cent gain in coal prices, all other thing being equal, means a $20m boost to Queensland revenue, the budget papers say. If contract prices rise and thermal coal prices hold up, this would mean an extra $1.4bn of revenue for the state.
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