COAL contract negotiations could become “more strained” owing to energy security concerns even as the same worry is forcing buyers to seek longer contracts, said Exxaro Resources CEO Ben Magara.
“This year, in the results that have just come out, we achieved 96% price realisation [against the benchmark]. That will become strained … because customers want to share their pain. So I think that is a concern for us,” said Magara in an interview following the group’s annual results on Thursday.
Exxaro reported an average export price of $86/t against an API benchmark of $90/t for the year – itself well down on last year’s $105/t average. However, the coal price has increased to $110/t as the world’s energy market adjusts to supply concerns amid the US/Israel attack on Iran and Iran’s reciprocal attacks.
Magara, who said futures prices were touching $120 to $125/t, indicated the company would sell more coal into the higher price environment, catalysed by an improved performance by Transnet on the Mpumalanga and Richards Bay coal line. He also said that buyers were looking for more energy security.
“I think the perception and concern is that this will not be over, even if the guns stop today,” said Magara. “I think the global players are beginning to want to create real long-term agreements. So we are seeing the likes of Japan – which is a very reliable customer – very keen to get a high-premium coal contract over a longer period, because they want energy security.
“So I think energy security is a real game-changer,” he said.
A sustained conflict in the Middle East would also start to impact negatively on mining inflation, said Magara. “The mining industry has chemical processes in refining minerals. You need sulphuric acid, you need a lot of oils, you need fertiliser for the agricultural industry – all that comes from oil refining.
“So all that sympathetic impact on agriculture, mining, and the chemical industry is something that over time … [will] hit inflation. But at least we … have the opportunity of coal prices going higher, as we are seeing, to offset that.”
Riaan Koppeschaar, Exxaro’s financial director said that for every 1% increase in the oil price there was a negative R16m hit to the group’s Ebitda which would partly offset the positive R127m increase in Ebitda for every $1 per ton increase in the coal price.
Earlier on Thursday, Exxaro declared a R10 per share (R3.4bn) final dividend following an 8% increase in headline earnings of R32.47 per share for the 12 months amid subdued thermal coal prices. On an attributable basis, earnings fell 14 cents per share to R31.78.
“Overall, the environment for the coal business remains challenging but export prices likely to benefit from current events in the Middle East,” said Investec commenting on Exxaro’s sales outlook in the current environment.
Said Magara: “We are increasing export production between eight and 10% as per our guidance.” Exxaro has guided to exports of 7.3 to eight million tons from 7.1 million tons last year. Total coal production is guided to 39.4 to 42.8Mt. Coal sales have been guided to 39.4Mt to 42.8Mt for the current financial year.
