Small miners hit the jackpot as China slashes production
By The Business presenter Elysse Morgan
Posted about 2 hours ago
As get-rich-quick schemes go, coal is blowing the lights out.
After declining at pace for the past five years, the commodity, also known as black gold, has risen in the past couple of months, thanks to our northern neighbours.
"This year coking coal prices have risen by over 150 per cent and thermal is over 60 per cent higher over the past four months and that's a really strong performance," said Paul Bloxham, chief economist at HSBC.
Overnight, the world's second biggest steel producer, Japan's Nippon Steel, agreed to huge prices for Australia's coking coal. Coal has gone from a contract price of less than $93 for the September quarter to $200 in the December quarter.
In short, that has been due to China slashing production.
"They've cut working days on coal mines from 330 days to 276 days in order to remove excess capacity from the industry," said Mr Bloxham.
"Coal mines have been operating at losses in China and that's been weighing on the financial system adding to non-performing loans."
As a result, shares in Whitehaven Coal have soared, while small players have also started to benefit from price rises, including small producer Stanmore Coal.
The newly formed company last year bought Isaac coal mine from Sumitomo Vale for just $1.
"We started it up in February this year and we've been shipping coal up to steel mills in Asia ever since about May," said Nick Jorss, managing director of Stanmore Coal.
"I can't say we predicted the speed at which the price would rebound, but we knew the fundamentals were good."
Stanmore's stocks have rocketed 527 per cent over the past year, and it is not alone.
Terracom also paid just $1 for Rio Tinto's mothballed Blair Athol mine, and its shares have jumped 350 per cent so far this year.
How long will this last?
There are still plenty of major companies including Peabody Energy, Anglo American and Rio Tinto that are trying to get out of coal assets.
"The big guys haven't always got it right exactly. If you look at the last cycle you know the guys who started up then excel. Felix, Whitehaven, Macarthur, New Hope — they've done extremely well out of picking up assets that the majors had discarded," said Mr Jorss, who was formerly an investment banker.
Mike Evans, analyst at stockbroker Curran and Co, who advises some of Australia's biggest funds, said commodities always carried risk, but coal had more upside.
"The upswing is a timely reminder of just how aggressive these swings can be and it could possibly swing the other way. That's certainly not our base case. I don't think we are," said Mr Evans.
"It is an astonishing result for Australian producers and I think that really does reflect the nervousness of coking coal and just how tight supply has become in a relatively short period of time."
Investors however, need to be mindful of the difference in coking coal and thermal coal producers. While coking is needed for steel, coal is not needed for electricity.
"There's a very strong voice in the community that thermal coal is dead or is at least dying and I think investors will be cautious of that and the emergence of renewables," said Mr Evans.
The key question is how long China will hold back its own production, while billions of dollars are flowing into the Federal Government's till.
"If the coal prices stay around the same level they're at right now, that would mean you would boost nominal GDP by about 2 percentage points and that would lead through to lifting tax revenues, state tax revenues particularly for Queensland," said Mr Bloxham.
Meanwhile, Glencore has just reopened its Collinsville mine in central Queensland, hiring more than 200 people.
"We're going to see more mines that have been mothballed looked closely at for the prospects of bringing them back to production," said Michael Roche, chief executive of the Queensland Resources Council.
