Global coal prices set to jump, says McDouall Stuart

Thursday 26th November 2009

Resurgent growth in the Indian and Chinese economies will strain world coal supplies, boding well for coking coal producers such as NZX-listed Pike River Coal and government-owned Solid Energy, says broker McDouall Stuart.

In a report by its head of research, John Kidd, the Wellington-based broking house predicts spot prices for premium coking coal will recover from their low of US$128 per tonne 2009/10 benchmark price to US$200 a tonne in 2010/11, still a third lower than the 2008/09 benchmark of US$300 a tonne.

"Global coal markets are rapidly returning to reflect their underlying fundamentals, and those fundamentals point to an increasingly severe mismatch in global supply and demand, particularly for metallurgical coal," McDouall Stuart says.

With China and India forecast to grow by 8.5% and 5.4% respectively in 2009, "there appears little now to stop a recovering global economy from steadily working its way back towards the tightness seen during 2007/08".

This makes prospects for local coking coal producers "very positive", although strike action across Solid Energy's mines are costing the company $10 million a week at present and leading to replacement sourcing by major customers such as NZ Steel. Likewise, the short term outlook for NZX-listed Pike River Coal Ltd is clouded by ongoing delays created by geological and other technical challenges.

It has also now breached the terms of a covenant with its US partner, Liberty Holdings, under which it was to have proven by this month the capacity to produce 800,000 tonnes a year. A Liberty Holdings team site visit had "not identified any major concerns", but the outcome of the process was "central to Pike River's immediate prospects".

While McDouall Stuart is confident Pike River will overcome those hurdles, its downgraded "hold" recommendation remains in place.

Businesswire.co.nz

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