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Prices paid for coking coal mines in Queensland recently were well above expectations. Bloomberg
by Peter Ker
The corporate sector's recent optimism towards coking coal prices found further support on Tuesday when the world's biggest exporter of the commodity raised its medium-term price forecasts by 13 per cent.
The Queensland government predicted prices for premium hard coking coal will remain above $US130 a tonne until at least mid-2022, in an advance on last year's prediction that it would gradually retreat towards $US115 a tonne in the medium term.
Queensland produces close to 50 per cent of the world's seaborne coking coal, and the state government expects the commodity to fetch $US161 a tonne in fiscal 2019, dramatically higher than the $US123 that was forecast for fiscal 2019 just six months ago.
Price forecasts for the subsequent three years were also upgraded in Tuesday's state budget, which dismissed the prospect that changes to the way Aurizon conducts maintenance on the state's coal railways would reduce exports.
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EMR managing director Jason Chang said Asian nations such as India and Vietnam would add to the future coking coal demand picture. Louise Kennerley
"The potential for reduced throughput over the Aurizon network following the economic regulator's draft decision on the 2017 draft access undertaking is also a consideration, although any impact is not expected to be significant and coal exports are expected to be higher overall in 2018-19," the government said.
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Industry intelligence firm Wood Mackenzie also played down the likelihood that Aurizon's stoush with coal miners would reduce export volumes and therefore royalties. 'We expect a slight fall in coal exports'
"We expect a slight fall in Queensland coal exports in 2019 due to higher thermal coal exports from NSW and a marginal decline in seaborne thermal coal demand, rather than any specific impact from Aurizon," Viktor Tanevski said.
The price upgrades in Tuesday's budget were a far cry from the predictions made just two years ago, when the Queensland government said coking coal prices would stay below $US109 per tonne in the four years to June 30, 2020.
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Pembroke managing director Barry Tudor said there was scarcity value attached to quality mines like the ones Rio sold earlier this year. Anna Kucera
Coking coal markets have since been transformed by supply cuts and improved demand in China, which prompted the price to briefly rise beyond $US300 a tonne in 2016, and it has averaged $US193 since those forecasts were made in 2016.
The government's price upgrades come after recent sales of coking coal mines in Queensland fetched prices that were far above market expectations, and as investment banks continue to upgrade their own price forecasts for the steel-making ingredient. Glencore's $US1.7 billion acquisition of Rio Tinto's Hail Creek and Valeria coal assetsin March implied a long-term coking coal price of $US140 a tonne, while EMR Capital's purchase of Rio's Kestrel mine implied a long-term coking coal price of $US170, according to UBS estimates. Market's attitude has softened
Initial reactions to those deals saw Rio lauded for running an auction that extracted inflated prices, but in the months since, the market's attitude toward the prices paid by the acquirers has softened.
JPMorgan raised its long-term price prediction by 28 per cent in recent days on the back of the proceeds achieved in the Rio mine divestments, expectations for India to double coking coal imports by 2035, and estimates for the marginal cost of constructing new mines in Queensland.
"We believe metallurgical coal will enter an incentive price environment as Indian steel production and coal imports rise over the long term due to a lack of [Indian coking coal] resources," JPMorgan said in a note.
The bank said a hypothetical new coking coal mine in Queensland, such as BHP's Wards Well project, would need prices above $US130 a tonne to generate a 15 per cent rate of return, and the bank now expects coking coal to average $US140 long term, up from $US110 a tonne.
"While our analysis shows that spot prices should be incentivising material volume growth, there has been a lack of recent project approvals. If the major miners continue to restrict new supply via 'value over volume' strategies, additional high-cost production will be needed. We therefore believe the balance of risks to our long-run analysis is skewed to the upside, which is a bullish scenario for existing producer margins," the bank said.
One of the few new coking coal mines under development in Queensland's Bowen Basin is the private equity-funded Olive Downs mine, which is being built by Pembroke Resources at a cost of about $400 million. Scarcity value
Pembroke managing director Barry Tudor acquired the asset near the bottom of the coal market in May 2016, and said there was scarcity value attached to quality mines like the ones Rio sold earlier this year.
"That is why there was such a frenzied reaction to the Rio assets. I do think those in the industry recognised [it was the last chance for a while to buy quality coal assets]," he said.
"Two years ago, when the market was in the doldrums, a lot of people were saying it is all over. It has its ups and downs but the fundamentals still apply. It is essential – people need steel for almost everything and the best place in the world for coking coal is the Bowen Basin.
"History shows there are times when it calms down and times when it heats up again, and I think we are in one of those periods where it is once again hot," Mr Tudor said.
EMR managing director Jason Chang said Asian nations such as India and Vietnam would add to the future coking coal demand picture, which is currently dominated by China, Japan and Korea.
He said EMR was not bothered by market perceptions that his syndicate, which included Indonesian miner Adaro, had paid a full price for Kestrel.
"We are not cycle players; we don't try to pick prices and pick cycles. What we want to do is invest in something and improve it so we get the returns from non-price related improvements, such as production ramp-up, cost optimisation and so on. We don't try to pick prices because no one knows," he said.
Premium hard coking coal from Queensland was fetching $US199.50 a tonne on Tuesday.
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