Credit Suisse ups its thermal coal price forecasts

Credit Suisse has revised its thermal coal price forecast for the fifth time since 2006.

In a March 4 research report on the Asia coal sector, the bank said it had reset its estimated benchmark price (Australia NEWC thermal coal annual contract) to US$120 per tonne for 2008, up 50% from its earlier forecast. For 2009 and 2010 it expects coal prices to remain at US$100 per tonne.

A number of factors are behind the tightening of the seaborne thermal coal market. China’s rising imports continue to offset growing supply from Indonesia.

Infrastructure constraints in Australia and South Africa and rising demand from new coal-fired power plants around the world have all contributed to the supply deficit, which Credit Suisse estimates will last from now until the end of 2010.

The rising cost of equipment and other mining inputs, the declining quality of many coal deposits, and coal mines that are in “less favorable geographic locations” have contributed to the higher price forecasts, Credit Suisse argues.

“The perception of sustained high oil prices, combined with the below-parity cost of coal versus other forms of energy, should also support the rising market shares of coal in the global energy market,” the Credit Suisse analysts write.

And as demand grows in a constrained environment, more consumers will be looking to marginal, higher cost coal producers such as the United States and Russia for at least part of their needs, the bank argues.

“With marginal producers, mostly North American and Russian, now likely running at FOB costs of US$70-$80 per tonne, we reset out long-term price at US$75 per tonne, (from US$60 per tonne.”

Credit Suisse believes coal remains the cheapest source of energy at a quarter of the cost of oil and about 20% of the cost of methanol and ethanol.

Indeed, as the price of oil soared from US$20 per barrel in 2002 to US$100 today, coal as a percentage of the global energy mix has moved up by 3%, offsetting the declining weight of oil (2%), it says.

“Adjusting for the inherent pollution cost via coal-oil conversion, the current spot coal price of US$140 per tonne (converted into oil) is at a 10% discount to the current oil price,” the report states. “At the Credit Suisse long-term oil price forecast of US$75 per tonne, the parity thermal coal price would settle at US$110 per tonne, according to our estimates.”

Credit Suisse has upgraded its earnings forecasts for the seven coal stocks it covers in Asia by 9% to 38%. Its favorite coal companies are China’s Yanzhou Coal Mining and Chinacoal, and Indonesia’s PT Indo Tambangraya Megah.