coal prices research_22nov10 _2_

8/7/2019 Coal prices research_22Nov10 _2_

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Melbourne Level 4 75-77 Flinders Lane Melbourne VIC 3000 Australia Telephone+61 3 8688 9100 Facsimile +61 3 8688 9155

Sydney Level 6 204 Clarence Street Sydney NSW 2000 Australia Telephone+61 2 9247 0077 Facsimile +61 2 9247 0044

Analyst Rod Buckton Email [email protected] Issued 22.11.10

Coal Price Outlook Prices to remain robust

Key Points1. We expect prices to remain robust through 1QCY2011, and provide our forecast

benchmark prices.2. Possible production interruptions in QLD due to forecast wet weather conditions (Nov-Jan

probability of above median rainfall 70-80% in key QLD coal production area) could tightensupply leading to further strength in prices.

3. In 2008, weather conditions in QLD which caused supply shortages lead to a spike in coalprices, and importantlylifted coal prices to a new floor price reflecting production costs,which have supported robust prices ever since.

Forecast benchmark prices for the March Quarter 2011 assuming business-as-usual:

Description Forecast Benchmark1QCY2011 Current price

Hard Coking Coal US$205 US$209

LVPCI US$150 US$147-151

Semi-soft coking US$145 US$138-140

Thermal (6322kcal) US$100 Annual price negotiated withJapanese utilities

Source: BGF Equities

Coal Outlook

The negotiations on 2011 contract thermal coal starting January for Japanese electric utilities areexpected to started in the last week of November, and conclude in mid-December at the earliest.The expectation of the suppliers is for increases justified by high demand, tighter supply andincreasing costs. Much of the coking coal market has moved to quarterly pricing and negotiationsare now becoming routine.

Spot prices at Newcastle have recently risen as high as US$110.00 FOB with an increase of aboutUS$15.00 in the last month. There is no particular tightness in the market but recent rains inAustralia and Indonesia in September have interrupted shipments during the peak season forbuyers re-stocking for the Asian winter.

Higher domestic prices in China have triggered an increase in Chinese imports which has also putupward pressure on thermal coal prices. Domestic thermal coal prices in China have reached as

high as US$124.50. The European spot has also breached the contract price since the beginningof October also as European utilities stockpile for winter.


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BGF Equities Research

Melbourne Level 4 75-77 Flinders Lane M

Sydney Suite 24 259 Clarence Street S

However, while the supply positithe winter peak but with increaseases. This assumes no interrup

Possible Interruptions in QueeThe wet season in QueenslandBureau of Meteorology predictNovember through January baphase over September and Octan extra 200mm of rainfall abov400mm over the key coastal port

The high SOI since August andaverage chance of increased Cy4.

Similar SOI phases occurred insupply generally and which shperhaps 3-4Mt of production. Thiperception (not a reality) of tightAustralian hard coking coal pricremember this very well. Severmajeure from 24 Jan to 5 June 2

Rainfall - Probability

lbourne VIC 3000 Australia Telephone+61 3 8688 9100 Fa

ydney NSW 2000 Australia Telephone+61 2 9263 2700 Fa

ion is not particularly tight, prices are expecteding price volatility in the new year as the suppltions to supply.

nslandmay yet have a bearing on prices in the near terthat the chance of exceeding median rainfall ied on a consistently positive Southern Oscillber is 60-70%. (see map below) This would bee the median over much of the Bowen Basin cs.

he persistent El Nina conditions also indicate aclone activity with 6-7 cyclones likely, compared

2000 and most recently in 2008. In 2008 floodit down part of the Ensham mine (see pictures event, along with a couple of other micro-eveness in supply, caused the mother of all coal ps hit US$300/t and thermal coal tipped US$125al were forced to declare force Majeure - B008 such was the severity of the flooding.

of exceeding Median Rainfall - November 2010 to January 2

Issued 22.11.10

simile +61 3 8688 9155

simile +61 2 9267 0806

o remain high for /demand balance

m. The Australianthe period from

ation Index (SOI)the equivalent ofalfields and 300-

87% higher thanto the average of

ing disrupted coal) with the loss ofts globally and aice spikes, where

/t. The miners willP declared force

11


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BGF Equities Research

Melbourne Level 4 75-77 Flinders Lane M

Sydney Suite 24 259 Clarence Street S

Price ForecastWhile the GFC has moderated2008 spike. Remember, hard cobelow) The costs of exploration,and it is this new cash-cost floothermal price which represents t

There are reasons to be optimisti

Coal demand is expectedaround 700Mt to 1000Mt b

Much of this growth in demseaborne thermal and PCI

Australia is in a good positiPCI product niches, and nthe demand.

BHP is expected to use it

move to monthly pricing tincluding adverse weather

The September rains havedepleted. Further disruption

lbourne VIC 3000 Australia Telephone+61 3 8688 9100 Fa

ydney NSW 2000 Australia Telephone+61 2 9263 2700 Fa

nsham Pit January 2008 (Source unknown)

rices, there has been no return to the low pricing coal was under US$50/t as recently as 2003acquisition and production have all risen sharp

r which has set the minimum coal price and itat floor.

ic about sustained higher coal prices:

to remain strong with growth in seaborne coal2020.

and will come from India and emerging Asian emarkets will grow the most.ion with quality coal resources, dominance of thw mine, port and rail capacity able to gain a si

market power in the premium hard coking se

o better take advantage of rapidly changingnd tightness in supply.disrupted some Queensland suppliers and stos will adversely affect supply and put upwards p

Issued 22.11.10

simile +61 3 8688 9155

simile +61 2 9267 0806

s from before the. (see Price graphly in recent yearsis the benchmark

to increase form

onomies with the

hard coking andignificant share of

ctor to push for a

arket conditions

kpiles have beenessure on price.


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BGF Equities Research Issued 22.11.10

Melbourne Level 4 75-77 Flinders Lane Melbourne VIC 3000 Australia Telephone+61 3 8688 9100 Facsimile +61 3 8688 9155

Sydney Suite 24 259 Clarence Street Sydney NSW 2000 Australia Telephone+61 2 9263 2700 Facsimile +61 2 9267 0806

Loss of supply due to inclement weather in Australia and Indonesia cannot be easily replacedby enhanced supply out of Africa, North and South America or Russia. All have infrastructureconstraints and if past performance is any guide, a tendency to drop the bundle when thepressure is on.

Forecast benchmark prices for the March Quarter 2011 assuming business-as-usual:

Hard Coking Coal US$205 (Currently US$209)LVPCI US$150 (Currently US$147-151)Semi-soft coking US$145 (Currently US$138-140)Thermal (6322kcal) US$100 (Annual price negotiated with Japanese utilities)

I would expect that prices will remain robust throughout 2011 and beyond.In the longer term, prices will respond to the advent of large volumes of cheaper thermal and softcoking coal reaching the market out of say, Mozambique and Mongolia. This new production is stilla fair way off and significant infrastructure and capital hurdles remain to be negotiated.

DisclaimerAll information, terms and pricing set out in this document is indicative, based on, among other things, market conditions at the time of this writing and is subject to change without notice. Thisdocument is for informational purposes only and is neither an offer to sell securities, or other financial products nor a solicitation of an offer to buy securities, or other financial products. BGF Holdings Limited,its related entities and each of their respective directors, officers and agents (together the Disclosers) have prepared the information contained in these materials in good faith . However, no warranty (expressor implied) is made as to the accuracy, completeness or reliability of any statements, estimates or opinions or other information contained in these materials (any of which may change without notice) and to themaximum extent permitted by law, the Disclosers disclaim all liability and responsibility (including, without limitation, any liability arising from fault or negligence on the part of any or all of the Disclosers) for anydirect or indirect loss or damage which may be suffered by any recipient through relying on anything contained in or omitted from these materials. Any reader is strongly advised to make their own enquiries andseek independent professional advice regarding information contained in these materials. In no way shall BGF Holdings Limited and its related entities ('the BGF Group') be deemed to be holding itself out as a

fiduciary of the recipient hereof. The recipient must independently evaluate any investment include the tax, legal, accounting and credit aspects of any transaction. Financial products and trading strategies of thetype described herein may involve a high degree of risk, and the value of such financial products may be highly volatile and may be adversely affected by the absence of a market to provide liquidity. To the extentthat this document includes any financial product advice, the advice is of a general nature only and does not take into account any individuals objectives, financial situation or particular needs. Before making aninvestment decision an individual should assess whether it meets their own needs and consult a financial advisor, the product disclosure statement, prospectus and/or available research in respect of the financialproduct. The BGF Group does not make markets in the financial securities referred to in this document. The BGF Group and its directors and employees may hold such financial securities and may, as principalor agent, buy or sell such financial securities. Copyright 2010 BGF Capital Group Pty Ltd. All rights reserved. This material is proprietary to the BGF Group and may not be disclosed to third parties. Anyunauthorised use, duplication or disclosure of this document is prohibited. The content has been approved for distribution by BGF Holdings Limited AFSL 234666.

coal prices research_22nov10 _2_

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