Citigroup hikes short-term coking coal price targets

Citing continued tight supply, Citigroup has raised its targets for metallurgical or hard coking coal for the next few years. A research report by analyst Alan Heap forecasts that prices will rise in 2009 and 2010, before gradually declining to a new long-term price.

Current high prices were caused by a confluence of events — “a perfect storm” that included flooding in Australian coal mines and energy crises in South Africa and China. Although prices in the thermal coal market have been volatile of late, Citigroup predicts that prices will remain firm.

The underlying reason metallurgical coal supply remains constrained is the limited potential for new supply, and the market is projected to remain tight for years. Meanwhile, demand from blast furnace operators is exceeding mine development. While exports from the U. S. address some of the shortfall, production constraints limit U. S. coal export volumes. For example, U. S. thermal coal exports are forecast to be only 20 million tonnes above 2007 export volumes.

Both rail and port capacities in Australia are being upgraded to handle 500 million tonnes per year by 2013, but capacity mismatches will limit exports to 340 million tonnes per year until then. As Chinese coal exports are limited, Citigroup doesn’t see Chinese production as a risk to international coal markets. The bank does not see much risk for steel demand destruction as a result of higher steel prices either; however, steel demand is not immune to economic downturns.

For these reasons, Citigroup projects that hard coking coal contract prices in Asia will rise from US$305 per tonne this year to US$339 in 2009, declining somewhat to US$335 in 2010, before dropping gradually to US$250 in 2014 and to US$150 (in 2008 dollars) in 2015. Citigroup’s long-term price forecast for hard coking coal is US$120 per tonne. For thermal coal, the projected Asia contract prices are US$145 per tonne this year, US$194 next year, and US$185 in 2010. The long-term price is expected to be US$50 per tonne.

In Deutsche Bank’s commodity quarterly from late June, analyst Robert Clifford sets less aggressive short-term targets for metallurgical coal. For 2009, he says that premium hard coking coal prices will drop to US$255 per tonne from US$300 in 2008. Prices will continue to fall to US$204 per tonne in 2010, US$163 in 2011, US$131 in 2012, and US$110 in 2013. Deutsche Bank says that the thermal coal market will remain tight in 2009, and then move back into balance in 2010. The bank projects that thermal coal prices will decline to US$80 per tonne in 2015 from US$160 in 2008.

Deutsche Bank sees thermal coal supply from China as more of a threat to the coal market than Citigroup does. Because export volumes are small compared to total production, they can be increased substantially while having little effect on the domestic Chinese market. The bank expects Chinese thermal coal exports to dwindle further in the medium term, before reaching a balance around 2011-2012.