A turning point of US coal stocks and dry bulk shipping?

Due to the glut of natural gas and environmentalist pressure, the domestic demand for coal has been depressed. US coal producers are looking abroad.

From Marketwatch

"The U.S. Energy Information Administration estimates 2011 exports surpassed 100 million short tons for the first time since 1992, and some market watchers expect exports to top that this year. ....................................

Higher sales prices in Asia and Europe have made sending coal to those markets more attractive, while U.S. emissions regulations and competition from cheap natural gas limit domestic demand.

Fast-growing China and India have been sucking up shipments to fuel an expansion of coal-fired power plants, disrupting traditional supply channels. South Africa -- a traditional exporter to Europe -- has been sending more shipments to Asia, creating a hole in the market that the U.S. has helped fill. "

The US coal exports could eventually hit a ceiling, as transportation costs will make U.S.-produced coal less competitively priced than coal produced closer to major Asian customers. However, shipping rates that are hovering around historic lows can help US coal exports. Meanwhile, dry bulk shipping that has been abysmal amidst a gigantic glut of ships may get a lift from increased coal transportation across the ocean.

Watch lists:
Coal- ACI, ANR, BTU, CNX, PCX
Dry Bulk Shipping- DRYS, DSX, EGLE, EXM, SB, NM

Disclaimer: I have no position of the above mentioned stocks in my personal account as of 2/6/2012. However, I may have distributed the information to friends, family and affiliates prior to the post. My friends, family and business affiliates may have positions in stocks I mention.

Potential Increase in Coal Imports to China

Amidst big sell-offs of material stocks, the possibility of reduced tariffs and port charges may offer a reason to feel a little better about coal companies or even a good opportunity to accumulate coal stocks before Chinese announcement for ardent coal bulls.

From Investors' Business Daily,

Yanzhou Coal Mining (YZC) and L&L Energy (LLEN) led a sell-off among China-based coal producers. But some U.S. coal producers gained ground, led by Peabody Energy (BTU) and Consol Energy (CNX).

China's miners fell on reports that the country's National Development and Reform Commission is "studying adjustments of VAT (value-added tax) and port charges relating to coal imports.

 "The country's energy commodity imports have declined recently, despite coal shortages and a looming electricity shortfall heading into the high-demand summer season. Analysts say lower tariffs and port charges could encourage more imports, helping hold down prices in China's tight coal market..........................

Although China does import U.S. metallurgical coal for use in steel production, chances are slim that it will turn to North America for more thermal coal, according to analyst Meredith Bandy with BMO Capital Markets. China likelier will buy coal from Australia and other sources that otherwise would end up in Europe. The Europeans probably would make up the difference via purchases from the U.S. Peabody could profit via the Australian and U.S. channels. "Peabody is the U.S. stock that would most directly benefit," Bandy said. "About half their value comes from Australian operations."

On the metallurgical side of the business, miners like Walter Energy (WLT) also face a potential windfall.

On the side, some analysts are betting on labor strikes in Australia to boost shares of coal companies.

Australian miners voted Thursday to give their unions the right to strike. The unions are in negotiations with BHP Billiton (BHP)-Mitsubishi Alliance, the world's largest producer of seaborne met coal."If this strike occurs — and we don't know that it will, but if it does — these met coal guys will probably go crazy," Bandy said.

Disclosure: The author of this post does not own any positions of the above mentioned stocks as of June 7, 2011

Metallurgical Coal is Red Hot

From Business Week,

June 1 (Bloomberg) -- JFE Holdings Inc., Japan’s second- largest steelmaker, and two rivals agreed to a 12.5 percent price increase for coking coal contracts with BHP Billiton Ltd., three people with knowledge of the agreements said.
Prices for the steelmaking ingredient will rise to $225 a metric ton for the July quarter, from $200 a ton for the three months started April 1,...........

Coking coal will be in tight supply globally this year as imports by China, where domestic production can’t meet demand, may reach the second-highest on record, Citigroup Inc. said April 22. Prices may reach $300 a ton in the second half, equaling a record set in 2008, the bank said in the same month.

“The price rise for BHP Billiton is in line with our expectations,” Lyndon Fagan, a Royal Bank of Scotland Group Plc analyst, said by phone in Sydney. “Coking coal is looking like one of the strongest commodity markets.”

From Forexyard

Nippon Steel Corp, the world's No. 2 steelmaker, will likely seek to increase steel prices by an average 25,000 yen in July-September to pass on the rise in costs, the Mainichi newspaper reported.


Nippon Steel will aim to lift prices to 100,000 yen a tonne in talks with automakers and other with automakers and other customers, the paper said, adding that it was in late-stage negotiations for April-June to raise prices by 15,000 yen per tonne to about 90,000 yen

.


 

Coal Price Forecast 2010-2011

Analysts mostly expect a rise in coal prices in 2010 and 2011, especially metallurgical (coking) coal, citing recovery in the global economy and tight supply.

Coal Prices may Head Up

• UBS analyst Henry Kirn and Citi Investment Research analyst Brian Yu both expect higher coal prices in 2010 and 2011.
• Yu expects prices for coking coal will settle at $200/ton in 2010 and 2011, up from earlier forecasts of $140/ton. Latest available data from the Energy Information Administration (EIA) has coking coal selling for $137/ton.

World coal price expected to increase

• Analysts at Macquarie Bank expects an average world seaborne coal spot-price increase of 15% this year to $82.50/metric ton from $71.75 in 2009 while Merrill Lynch forecasts a 20% hike to $86.
• Neither forecaster sees prices spiking back to the $127 level of 2008.
• Macquarie analyst Carol Cao says in a research note that the recent 30% spot coal price surge to $100/metric ton "has been largely due to weather issues," and she expects to see lower spot prices at the end of winter. Still, winter costs are rising; Macquarie says internal Russian coal transport costs have risen to $75/metric ton to ports in both the Baltic and the Pacific, which will cause winter export prices to rise soon.
• With the world coal price increase, the risk of a new resources tax and slim chances for a tariff hike in the first half of 2010, Merrill Lynch analysts also think Chinese independent power producers will face a "material margin squeeze" at least in the winter of 2010.
• Fitch Ratings expects only a "modest increase" in domestic steam coal prices in the second half of 2010 from the $53 average of 2009 on partial recovery in domestic industrial power demand and less gas for coal substitution.

World coking coal prices seen rising
 

• Scotiabank economists predict that the cost of coking coal will increase by 31% this year to $169/metric ton in benchmark Asian markets from an average $129 in 2009.
• J.P. Morgan Securities is slightly less bullish, projecting 24% inflation to $160/metric ton.

Mr Coal Optimist vs Pessimist?

Two large coal miners, Patriot Coal (PCX) and Massey (MEE) reported earnings this week. The media has portrayed PCX;s earnings report as being good while MEE's earnings report being bad. The optimist was rewarded with a jump in the stock price after the release while the pessimist was punished. Reading between lines, they both are telling the same story. Just in different tones.

At PCX,
in an article of Miningweekly,

The CEO Richard Whiting said on Tuesday that markets for both coal segments remain "challenging", but that the company expects to see improvements during 2010. The demand for its steelmaking and thermal coal will recover strongly in the “near term” according to Whiting.

“We believe the markets are at an inflection point, poised to see a substantial improvement in demand in 2010, in both metallurgical and thermal coals,” Whiting said on a conference call.

“While we don't expect the market recovery to be in full swing by early 2010, we are optimistic that the timeline for recovery is more within our sights than it seemed just a quarter ago,” said CFO Mark Schroeder.

He said there is no doubt that metallurgical coal demand around the world is rebounding.

“And because of the limited availability of high quality met coal in the world, our forecasts show demand outstripping supply, and therefore driving up met pricing as we move into and through 2010.”

Patriot is also expecting to see domestic demand for thermal coal improve “significantly” in the next six to nine months.

Demand will likely exceed supply for US thermal coal, especially for central Appalachia, around the end of 2010, he said.

“And the change from oversupply to undersupply may be abrupt, taking place over a very short period of time.

“With upward pressure on demand and downward pressure on supply, we believe the effect on pricing will be meaningful.”

Although inventories remain high, customer sentiment is showing signs of improvement.


At MEE,
in a report at Yahoo Finance,

The CEO Blankenship said worldwide production and use of coal will likely increase by more than 120 million tons per year during each of the next five years.

But "the macroeconomic factors facing all businesses and particularly the coal industry have never been more
challenging," he said.

He expected domestic thermal coal demand to remain weak for the next several quarters and perhaps through 2010. Utility stockpiles remain very high and the amount of coal being burned was low.

"We continue to be encouraged by the positive news we are hearing from the seaborne metallurgical coal export markets," he said, noting steel production in China was up 22 percent in August and 5 percent for the first eight months of the year.

Steel producers have restarted or announced plans to restart more than 40 blast furnaces that have previously been idled, Blankenship said, adding that Massey has the capacity to produce more than 12 million tons of metallurgical coal per year.

Supply will be constrained by permits

At PCX, in a report by Miningweekly,
"Supply will be constrained by the delays that miners face getting new surface mining permits, and a lot of production that has been taken off line may actually leave the market permanently," Whiting speculated.

At MEE, in a report by Reuters,
"The demand for coal to generate power and make steel is growing, but environmental bureaucracy is making it more difficult to mine the fuel," Blankenship  said on Wednesday

Last month, the EPA ruled that all 79 pending mine permits in Appalachia must undergo additional evaluation, because they pose a potential hazard to water in parts of Kentucky, West Virginia and Ohio.

In a nutshell,
No significant recovery is expected before the end of 2009. The demand for metallurgical coal is looking good, expected to come around in early 2010.The demand for thermal/steam coal is expected to come around only in later part of 2010.

Is it just me or it's the tone of Mr. Whiting and Blankenship? Had Mr Blankenship colored his speech with more adjectives like "significant", "substantial", "optimistic", "near term", the stock price probably would have received "significantly" more generous treatment from the Wall Street.


Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.



Disclosure: The blog author has no positions of PCX and MEE in her personal account as of October 29,2009

Outlook of Coal

In an article in Barron's on October 4, "Peabody stock to double as coal use leaps":

Global coal use is projected to jump by 55 percent by 2025, a trend that could help shares of Peabody Energy Corp (BTU.N) double over the next few years, Barron's said on Sunday.China and India will likely drive the growth,.....................................................The St. Louis-based company's coal reserves in Australia and in Wyoming's Powder River Basin could be worth $18 billion, said Peabody's chief executive, Greg Boyce..................

In another article, "RBS Global Banking raises forecasts for thermal coal"

Bloomberg reported that RBS Global Banking & Markets raised forecasts for thermal coal to generate power and coking coal to make steel, citing higher than expected production costs.

Thermal coal will sell for USD 75 a tonne in the year ending March 31st 2011, up from a previous USD 70 estimate. Coking coal will sell at USD 150 in the period, 15% more than the earlier forecast.

Annual coking coal contract prices fell 57% to about USD 129 a tonne this year as global demand slumped. Power coal prices at Richards Bay have dropped 58% in the past 12 months to USD 60.80 a tonne as companies on the continent cut output in the worst recession since World War II.

Thermal coal will account for 19% of all dry bulk commodities hauled at sea this quarter. Coking coal will make up 7.9%. As a single commodity, only iron ore generates more seaborne trade.