Why king coal is a merry soul

Wesfarmers knew a thing or two in May last year when it snapped up the Curragh coal mine in Queensland for an almost derisory $200 million, and hungry Rio Tinto has just swallowed the Australian coal assets of the US Peabody giant for $1 billion

Coal has been the pits for around four years, shafted by tumbling prices, excess production and competition from other sources of power. Now it is coming in from the cold and lifting the shares of the companies that dig the stuff up.

The spot price of steaming coal, which is used for heating, has pushed up from US$21 a tonne to $29 in recent months. Coking coal, which powers blast furnaces in the steel industry, and is traded on a contract basis, is also very firm. The prices of both are expected to get another early boost from the annual contract negotiations between Japanese steel mills and power companies, and the Australian producers which sell 64 million tonnes of coal a year to Japan.

The closure of three big Canadian mines (Smoky River, Quintete and Gregg River), shutdowns in Spain, Germany and the UK, an explosion at the US Willow Creek mine, strikes in Indonesia and shrinking Chinese exports, have soaked up much of the excess world capacity.

Negotiations with Chubu Electric and Tohoku Electric on steaming coal prices will begin soon .The power companies have been able to wrestle prices down for five years. The consensus this time is that the $28.75 a tonne reference level will be forced up by four per cent to seven per cent, with some energy bulls forecasting more. The coking negotiations are already under way. The owners of the steel mills, running at record capacity only a few weeks ago, are pointing to the spluttering Japanese economy and the effect of a US slowdown on Asian manufacturers. But here too, the prediction is for a five per cent increase over the $39.75 a tonne price set in the last round.

Sydney-based commodity analyst Chris Lancaster of brokers Hartley Poynton says: “the chronic tightness of supply is terrific news for producers. Irrespective of whether the US has a hard or soft landing, we are clearly at the base of the coal pricing cycle and strong price increases are forecast for the next three years”.

Well-timed buying of the black stuff was one of the factors pushing Rio higher last week. The stellar run in Wesfarmers was partly powered by the fact that it derives 25 per cent of its earnings comes from coal, roughly the same proportion as MIM gets. Washington H Soul Pattinson derives 40 per cent of its profits from coal. Shares with undiluted exposure to the commodity suffer from poor liquidity, but both Austral Coal and Centennial Coal (82¢) are worth a glance.

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