Thermal coal is interesting. Everybody needs this thing even its price soared more than 30% since 2009. This guy did not see how hard those people tried to get them, even they have to search them until the centre of the earth or have to dried him first to make it valuable in the market. With this guy, most of Indonesian companies who sold them have priced so high by investors, let’s say Bumi Resources, Adaro Energy, Indika Energy, Harum Energy, etc. Not only to the producers, the contractors even have high value to the market. What about the outlook?
Let’s see its price first. The highest coal price recorded was on 2008 financial crisis, reaching more than US$190 per ton on July 2008. Presently, Newcastle Coal Index says the number has shrunk 35% to US$124 per ton. The lowest price post 2008 crisis was made on March 2009 at around US$65 per ton, before stood at another peak on January 2011 at US$140 per ton.
One might wonder what triggered coal price’s movement? From two financial crisis above, we can take some conclusions:
1. Major consumer plays big part in controlling the price. They are US, China, India, Indonesia, and Brazil. How come? Those countries have the largest population in the world. Logically, more people in the country means more energy needs. Animals and plants need no electricity right?
2. Major producer also controls the market. How come? Let’s take an example on the Queensland flood in early 2011. Queensland is the largest coal producer region in Australia where most of major Australian countries have hands there: Rio Tinto, BHP, Cockatoo, etc. There is an interesting story behind this. Queensland production for January – December 2010 for Rio Tinto and BHP totalled at 30.31 million tons, less than combined 2010 production of China Shenhua of China Coal of approximately 32 million tons. However, the price was doubled from US$70 in August 2010 to US$142 to January although the Queensland production did not affect much on worldwide production! Regional issues and future expectations truly bring high effect on this commodity.
3. The condition of its ‘substitute’ commodity such as oil and gas. Bear in mind that coal cannot substitute oil and gas. Why? Coal-fired power plants are not as same as fuel or gas powered plants. They have different machines, different generators, different heat, and so on. However, the condition of the ‘substitute’ commodities will affect the coal price. If oil & gas are in critical supply, price in coal will arose, assessing that the demand of coal will higher especially on power plants. Same in the opposite, when coal supply is low, oil price will arose. The example is just like what we feel now when the investors assessed oil supply is in threat on Arabic & North African counties’ coup.
Well, there are still more to come such as regulations, country debts, electricity expansions, and others, but three stated above is the most influential. Now, let’s take a peek what did they say about this commodity? Let’s filter up several coal companies in the world. This time, I will take a peek in Rio Tinto, China Shenhua, Peabody, and Straits Asia to make a comparison.
Rio Tinto
Rio’s most thermal coal production lies in Queensland. Its first half production reached 8.78 million tons, a 2 percent increase from 2010 first half. This is quite interesting as the company’s Queensland flood hit Rio’s mine and impacted an estimated loss of 8.8 million tons in the first quarter.
Rio said there are two material disruptions on the first half demand: Japanese tsunami and earthquake disasters, and China’s significant demand rose. Well, Japan’s disaster caused low electricity production from its coal fired plants from 7GW to 2GW. On May 2011, Chinese net coal imports soared up to 50% from the previous month, increasing domestic coal prices and demands, following the coal shipment divert from Japan to China.
However, Rio says thermal coal outlook will remain strong with Asian and Indian high demand. Supply for the major exporting hubs of Australia, Indonesia and South Africa is expected to grow. Additionally, data from Federation of Electric Power Companies indicates heavy purchasing of thermal coal from Japan post disaster relief.
China Shenhua
The largest state-owned coal miner in the world and China’s largest coal producer China Shenhua Ltd has huge advantage on its position as Chinese coal company, in my opinion. Most of Shenhua’s coal production absorbed by China following bigger needs on fuel energy. According to its first half operational report, its production and sales rose 3.2% and 11.6% respectively. Compared to 2010 and 2009, the numbers has been gradually increased.
China Shenhua Ltd | 1H 2011 | 1H 2010 | 1H 2009 | 1H 2008 | Change 2008 - 2011 (%) |
Coal Production | 140.4 | 109.2 | 105.8 | 90 | 56.0 |
Coal Sales | 191.2 | 137.4 | 123.1 | 115.1 | 66.1 |
(in million tons) |
If you look the statistic above, Shenhua is one of the most promising companies in Hong Kong. Since its lowest price in October 2008 at HK$11, the price now has folded more than three times to the present HK$33.7. At that price, the company valued at HK$114.55 billion or approximately US$14.7 billion, higher than Peabody Energy (US$12 billion) and doubled than Indonesia’s largest coal producer Bumi Resources (US$6.5 billion).
Not only within the performance, the Mongolian government’s plan on coal railway development, energy-hunger Japan, and of course the 19 billion yuan of mining expansion would make this company has bright future at least until 2012.
Peabody Energy Ltd
Peabody claimed itself as the world’s largest private-sector coal company in the world with market cap of US$12 billion. Let’s just hear on Peabody’s outlook.
Peabody targets EBITDA of $575 to $675 million in the upcoming quarter with expectation on beneficiary from higher volumes and continued strength in pricing for Australian seaborne met and thermal coal, amid the weather impacts on US shipments.The company targets 2011 sales of 245 to 265 million tons including 30 million tons from Australia, 205 million from US mines, and the rest from brokers.
Straits Asia Ltd
I keep a tab on Straits Asia because it is the only Indonesian-operated coal company that brings outlook to Indonesian coal. During the first half, Straits took big advantage in Chinese renewed buying interest, which mostly on spot prices, and resulted in higher prices. If you look at Straits operational report, its gross profit boosted 84% in the first half but its production and sales were stagnant (4% increase on production and less than 2% increase on sales). It means, higher coal price truly boosted Indonesian coal income.
The outlook for coal prices remains strong for H2 2011. As at 30 June 2011, the group had committed the bulk of planned production for 2011 for sale. Of the remaining shipments for the year, approximately half are priced on an index linked basis, providing the business with a good balance of exposure to market prices in the second half of the year.
As a conclusion, I can take several things from all outlooks above.
1. China demands still high for upcoming quarters though increasing price on spot market. China’s decision on higher coal import in recent months will bring significant impact on major coal companies, mostly in Asia-operated.
2. Japanese coal demand will rise in the upcoming months. The country cannot restart the Fukushima plant yet, which supply up to 4.7 GWe to Japanese people. With the condition, the country will need high supply of other energy fuel to pump up their electricity, especially in coal. Several Japanese coal companies had made a big number of tenders lately and a insider report said a number of coal companies such as Kideco and Bumi had won some.
3. High demand from foreign countries seems will make Indonesian coal companies to make more exports in upcoming quarters especially on spot prices. But bear in mind that spot prices has huge volatility in price movement, depending on the present situation.
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