Australian floods, Chinese snowstorms put the squeeze on world's coking coal supplies
The Globe and Mail
Published February 5, 2008
ANDY HOFFMAN
MINING REPORTER
If the top brass at Fording Canadian Coal Trust are ever looking for a new line of work, perhaps they should consider a career in meteorology.
In December, the income trust put itself in play, announcing a strategic review that could include a sale of the company and its 60-per-cent interest in the Elk Valley Coal operations, which supplies coal to the steel industry.
Since then, Fording's prospects (and presumably the price of a potential takeover) have brightened immensely, thanks to a bout of unexpected bad weather.
Devastating floods in Australia and unprecedented snow storms in China have squeezed the supply of coking coal so much that record prices for the 2008 coal year now seem all but inevitable.
"Some hardships have certainly changed the supply picture. The flooding in Australia seems to have changed the way people are looking at the coal pricing," Fording spokesman Colin Pertyk said in an interview.
The coal market tightness comes just as representatives from the Elk Valley partnership have travelled to Asia to meet with customers and settle prices for the 2008 coal year, which begins April 1.
Over the weekend, industry trade publication McCloskey's Coal Report said that a contract for "hundreds of thousands of tonnes" to be sold at $275 (U.S.) a tonne was negotiated between a coal producer and a customer, representing a massive premium to prices negotiated for the 2007 year.
For example, Fording's share of the roughly 23-million tonnes of coal expected to be produced at Elk Valley's Western Canadian operations during the 2007 coal year is sold for $91 a tonne.
Many analysts are predicting a dramatic coking coal increase for 2008, with some forecasting prices could reach $170 a tonne. UBS Securities Canada Inc. recently upgraded Fording from "neutral" to "buy" and increased the price target for the company's units on the Toronto Stock Exchange from $40 (Canadian) to $50.
John Hughes, an analyst at Desjardins Securities in Toronto, is forecasting a $140 (U.S.) per tonne met coal price in 2008, but said that given the current situation, the settlement could "easily" reach $160 a tonne.
"It's a metallurgical coal seller's market," Mr. Hughes said, adding that prices could average $150 a tonne for the next two or three settlements.
"The experience over the last three years has been less supply, not more, and therefore I think we're going to have metallurgical coal prices that are historically high over the next few years," he said.
Mr. Hughes said that Fording could be acquired for $55 (Canadian) a unit.
In addition to the most logical suitor, Teck Cominco Ltd., which already owns a near 20-per-cent interest in Fording and a 40-per-cent stake in the Elk Valley operations giving it a 52-per-cent interest in the overall partnership, Mr. Hughes said that Fording could also garner interest from major producers such as BHP Billiton Ltd.
Fording units rose to a 52-week high yesterday, jumping 5 per cent as investors snapped up coal stocks on the bullish price signs. The gains are in addition to a 22-per-cent increase the company has enjoyed over the last month.
For much of the past year, Fording's outlook has been clouded by its exposure to the strong Canadian dollar.
However, investors seem to have shrugged off their worries about the buoyant loonie and are now focusing on the supply disruptions in Australia.
Last month, BHP declared force majeure because of flooding at several of its Australian mines. The world's largest miner has reportedly put off coal settlement negotiations with customers until it determines how long shipments will be stalled.
Jay Turner, an analyst at BMO Nesbitt Burns, believes that speculation that coal contract prices for 2008 may hit $200 a tonne may be overly optimistic. He still rates Fording "underperform" but is reviewing his forecasts.
"Given that China isn't importing large quantities of hard coking coal, and with growing concerns of a U.S. recession impacting the global economy, slowing met coal demand may offset much of the perceived tightness as the price negotiations are extended," Mr. Turner said in a note to clients.
Suddenly everybody loves coal
WHY NOW?
Flooding in Australia, snow in China and power outages in South Africa have put a massive crimp in world coal supply. The deepest problems are in the Australian state of Queensland, which is said to supply up to 70 per cent of the seafaring global coking coal market. The world's largest coal exporter, BHP Billiton and its partner Mitsubishi Corp. of Japan have said that production could be curtailed for up to six months because of heavy rains.
TYPES OF COAL
Coking coal, also called metallurgical coal, is used in the production of steel. Thermal coal is used in power production.
WHO'S BENEFITING?
WESTERN CANADIAN COAL
It was on the brink of economic collapse in November as low prices, a strong loonie and mining problems had it teetering towards insolvency. Just a few months later, a refinancing deal, a "strategic review" to consider selling the company and the potential to reap the rewards of a record coal price have brought the miner back to life. The stock rose 9 per cent yesterday and is up 33 per cent this year.
GRAND CACHE COAL
An upstart coal producer based in Calgary, Grand Cache has been a standout on hopes it can ride out the strong dollar storm and secure a strong 2008 price for its relatively small annual production of 1 million tonnes. The stock surged 23 per cent yesterday and is up 93 per cent over the last month.
TECK COMINCO LTD.
Beaten down Teck shares finally found some relief thanks to bullish speculation on the 2008 coal price.
With control of 52 per cent of Elk Valley Coal, Teck's stock posted its biggest two-day gain in more than five years, rising 5.5 per cent yesterday and 6.5 per cent Friday.
