After a prolonged period of price falls and sector weakness, thermal coal prices have had a solid start to the 2016 year
Following five consecutive years of price declines, thermal coal prices are showing signs of a recovery. Thermal coal prices have jumped to year highs due to a reported surge in demand from some large Chinese buyers looking to shore up their inventories. The price of high grade Australian thermal coal, the benchmark for the Chinese market, has climbed 25% from a low of USD48/t in January to over USD60/t, according to the Bloomberg figure below. These price rises are positive for both Australian coal producers, and in turn, domestic coal terminals – particularly Newcastle Coal Infrastructure Group (NCIG), which is predominantly a thermal coal exporter.
Source: Bloomberg
The broker market has also revised its short term coal outlook upwards. Citigroup has upgraded its thermal coal price forecasts for 2016 to 2019, with thermal coal up by 12% to 37% from 2016 to 2018. According to Citi, China’s steep production cuts are simultaneously raising demand for seaborne coal, and they are now ‘bullish’ on short term thermal coal prices. Similarly, Bank of America analysts have raised price forecasts for Newcastle thermal coal for the second half of this year to USD59/t, up from an earlier projection of USD46.50/t.
Morgan Stanley says Australia’s thermal coal export industry can be part of the solution to the global emissions reduction challenge, as well as commanding premium pricing. Its call is based on the move towards new high efficiency, low emissions (HELE) coal fired power stations in the Asia Pacific region, leading to more demand for the higher quality coals Australia produces. According to Morgan Stanley, demand for coal should be steady in absolute terms in the Asian market and within this, demand for high quality, high energy thermal coal will likely rise.
Morgan Stanley also indicated that despite perceptions, thermal coal was not facing a permanent decline in the face of needing to reduce emissions. It stated that carbon emissions can be reduced by over 20% in HELE plants, and further benefits can be achieved through the use of higher energy thermal coal.
China
China’s steep production cuts are simultaneously raising demand for seaborne coal. It is cutting use of thermal coal as a source of energy, but also reducing production in an effort to control pollution. According to Bloomberg, China’s coal output fell by 15.5% in May from a year earlier and the country plans to eliminate as much as 500 million tonnes of production capacity, and consolidate a further 500 million tonnes.
In addition, the AFR has reported that China is set to ban the construction of new coal fired power stations as part of its latest five year plan, in an attempt to utilise wasted renewable energy and put a stop to over investment. While a change in the energy mix towards renewable energy would reduce the demand for thermal coal in China, the cuts to production are currently having a positive impact on thermal coal prices.
Bond market update
After a period of deteriorating coal market operating conditions, the moderate recovery in thermal coal prices is positive for the sector. An improvement in the financial performance of the coal miners is ultimately a positive for coal terminals, as they rely on the miners’ continued operation and servicing of contractual take or pay obligations to generate revenues. The coal terminal bonds have all experienced price falls (and yield increases) this year, primarily as a result of the deterioration in the coal sector and associated rating downgrades by Moody’s.
While Moody’s has not provided specific coal price forecasts, it has stated in previous rating opinions that it believes the current coal market downturn is structural in nature, with weak conditions likely to persist and coal prices unlikely to recover in the next 12 months. Continuing strength in thermal coal prices may lead to Moody’s revising its bearish outlook on the commodity, which could prompt rating upgrades in the future. We note that while some form of recovery has been underway, it is unlikely we will see thermal coal prices revert to levels over USD100/t seen during the peak of the resources boom.
The share prices of thermal coal miners has responded well to price increases and the improved coal price outlook. For example, the share price of Whitehaven Coal (an ASX listed coal miner and NCIG shipper) has increased nearly fourfold from lows experienced at the beginning of 2016.
Indicative pricing on available coal terminal bonds is outlined in the table below:
| Bond | Rank | Export coal | Yield to worst* | Minimum investment |
| Adani Abbot Point 5.75% AUD 2018 | Senior secured | Thermal/Met | 7.80%** | AUD10,000 |
| Adani Abbot Point 6.10% AUD 2020 | Senior secured | Thermal/Met | 8.10%** | AUD10,000 |
| DBCT FRN AUD 2016 | Senior secured | Met | 5.60% | AUD50,000 |
| NCIG Holdings 12.5% USD 2027 | Structurally subordinated | Thermal | 11.30% | USD100,000 |
For wholesale investors only
Prices accurate as of 14 July but subject to change
Please contact your FIIG representative for further details on the coal terminal bonds available. The Adani Abbot Point 6.10% AUD 2020 and DBCT FRN AUD 2026 bonds are available to retail investors.
*Yield to worst represents the yield to maturity with the exception of NCIG, where it represents the yield to first call in 2027.
**Yields on the Adani Abbot Point Terminal bonds are inclusive of a 1.00% coupon on step up linked to the current credit rating on the bonds.