Commodities » Energy

Coal and consumable fuels review (March 2010)

By PSQ Analytics

Review of the past quarter

China became a net importer of coal for the first time in 2009, importing a net quantity of 103 Mt in the year, compared to net exports of 4 Mt in 2008. We believe this highlights a structural change in global coal supply flows leading to increased activity in the Pacific markets. Australia is one of the principal beneficiaries of this trend, shipping a record 277 Mt of coal in 2009 (+6% y-o-y). South Africa, meanwhile, sent 30% of its coal exports to India in 2009 as Atlantic demand continued to falter. This shift in global coal supply flows has also seen diversion of Russian coal from Europe to Asia. In light of this, as the European regional economy recovers, we foresee opening up of further opportunities for US coal exporters there. Coal prices continued to trend upwards during the last quarter of 2009, with gains in major benchmark coal price indices.

The demand-supply situation for uranium, however, appeared less favourable in the period, with prices soft and deals closing at lower levels. The imbalance is exacerbated by a planned sale of 200 tonnes of uranium by the US Department of Energy (DOE), following an earlier sale of excess inventory in December 2009.

Transaction activities

The acquisition of Felix Resources by Yanzhou Coal Mining Co. was the only billion-dollar plus transaction of the last 3 months in the Coal & Consumable Fuels sector, and no further major deals were announced during the period. The total value of deals closed during this period was USD4.7 bn, compared to USD13.9 bn in 2009. Indian state-owned coal mining company, Coal India, is expected to list in India, most likely in the second half of this year, in an offering of USD8- 10 bn. Other notable possibilities for IPOs this year include a joint USD1 bn listing on the London and Moscow stock exchanges by Russia’s largest steam coal producer, SEUK.

Outlook

The long term outlook for thermal coal is positive, with 220 GW of coal-fired electricity generation capacity expected to come online over the next 5 years, requiring over 750 Mt of coal. Most of this new coal power generation capacity is situated in China (79 GW) and India (69 GW) Source: Arch Coal, Inc. Investor Presentation February 2010. Over the near term, 2010 demand should also be firm with 72 GW of new coal-fired capacity coming online around the world. Over the near-to-medium term, we see improvement in demand for thermal coal in the US from the new coal-fired capacities coming online during the year and overall increase in electricity demand. The US DOE’s Energy Information Administration (EIA) projects coal consumption for electricity generation in the US to grow 4% during 2010 Source: Short Term Energy Outlook, February 2010. Meanwhile, steady depletion of secondary inventories of thermal coal in the US reinforces a favourable pricing scenario.

Average capacity utilization rates at steel plants around the world remained above 70% in the last quarter of 2009 and in January 2010 (+11.6 ppts y-o-y to 72.9% in January 2010) Source: Worldsteel. Meanwhile, although production of raw coal in Shanxi rose from a monthly average of 45 Mt in 2009 to 63 Mt in December 2009, restructuring and consolidation at coal mines elsewhere in China (such as in Henan province) should keep domestic supplies tight over the near-tomedium term. This is highlighted by the fall in total Chinese coal production by 3% m-o-m in December 2009, despite an 11% rise in production from Shanxi. Robust Asian demand and rising capacity utilization rates at steel plants in developed markets provide fertile ground for further hikes in asking rates for coking coal.

Despite positive long term expectations, demand for uranium in the spot market is expected to remain muted and prices are expected to remain soft over the near-to-medium term, with most Western utilities’ 2010 uranium requirements already contracted, the US DOE planning to sell 200 tonnes of UF6, and full-scale uranium production likely to resume at Australia’s Olympic Dam in June 2010.