WHAT a difference $10 can make; especially in the case of South Africa’s listed diversified mining companies with exposure to coal such as South32, Glencore and Anglo American who are enjoying the improvement in coal prices.
This has led Macquarie Bank to forecast much improved earnings for these companies. “The net effect on the coal-exposed equities has been a meaningful uplift in our earnings estimates as well as significant increases to TPs [target prices], especially for Anglo American, Glencore and South32,” it said.
The improvement for Glencore might have been even better had it not sold forward 55 million tonnes (mt) of production at a set price of $53/t which compares to a current spot price for thermal coal of $109/t.
Anglo American said at its half-year figures presentation in July that every $10 improvement in the price of thermal coal was equal to an additional $50m in pretax earnings. Given that the thermal coal has improved 64% in the last quarter, that’s a huge benefit to the bottom line.
“Among the diversified miners, Anglo has the greatest coal exposure in 2017 with 40% of the group’s earnings before interest, tax, depreciation and amortisation expected to be generated by coal,” said Macquarie’. “South32 follows at 35% while coal’s 23% contribution to Glencore’s earnings mix has been diluted by its coal hedge,” it said.
The improvement in coal prices is related to the implementation of a 276 day policy at China’s coal producers which has had the effect of cutting its domestic production capacity by some 300 million tonnes. Coupled with an increase in steel production, this led to a drawdown of inventories and higher pricing.
There has been talk that China may reverse this strategy – already it has called on some coal mines to increase production days – but the drawdown in inventories has been such that it will take time for new production to affect the price. The northern hemisphere is also moving into winter which means demand support for coal will be strong, at least for the next four to five months.
Anglo American declined to comment directly on the improved coal prices. “While we appreciate the improvement in the commodity prices, our focus remains on increased productivity, managing our cost structure, and improving our safety performance,” said coal division spokesman Moeketsi Mofokeng.
However, the feeling among coal producers is that they can’t quite believe in the rally since China appears to hold all the aces.
“The export market has picked up significantly over the recent past,” said Waheed Sulaiman, CEO of Wescoal Holdings. “But when we speak to traders a lot of it seems to be driven by China and the challenge is that it’s difficult to predict what is going to happen there. They are driving the export market,” he said.
Macquarie said prices for hard coking coal in 2017 and 2018 would be 24% and 4% higher than the forecast $150/t and $120/t respectively. Thermal coal forecasts of $64/t and $58/t for 2017 and 2018 would be increased 11% and 5% respectively.
Said Investec Securities: “This highlights the benefits of a diversified portfolio for both large traders and diversified mining companies in that surprise rallies do occur and by not having exposure one can miss out altogether.
“Although the reverse can also happen, however, in the case of miners, having tier one assets provides protection, and for traders, they need not necessarily trade in more distressed markets or can certainly reduce exposure if necessary”.
Said David Brown, CEO of Coal of Africa: “The coal commodity market has experienced a sensational recovery during the 2016 calendar year. CoAL is optimistic about the opportunities created by the commodity price increase for both its Vele Colliery and the Makhado project, but it needs to evaluate the sustainability of these prices as part of the investment decisions for these projects”.
