Soaring coal prices will stay strong through the Australian summer according to Whitehaven Coal chief executive Paul Flynn, who believes China’s recent supply cuts have signalled a long-term floor in the commodity price.
Speaking after coking coal prices rose by 7 per cent on Tuesday to continue their extraordinary rally, Mr Flynn said the crucial quarterly contract prices for coal would be higher in the first quarter of 2017 than the bumper prices set for the current quarter.
Miners and customers recently agreed to a December quarter price of $US200 per tonne for premium hard coking coal, which has some Australian miners earning profit margins of more than $US100 for every tonne shipped.
But daily market prices for the commodity have surged ahead of that contract price, with the market or “spot” price hitting $US289.30 per tonne on Tuesday morning.
Mr Flynn said the stronger “spot” price meant customers would be under pressure to accept a higher contract price for the first quarter of 2017.
“Who is going to want to [set the contract price] at a level that materially undermines what you could otherwise get by selling into the prompt market,” he told The Australian Financial Review on the sidelines of the International Mining and Resources Conference in Melbourne.
“You will see an updraft carry that as you did with the last settlement.”
He said contract prices should also rise for thermal coal and semi-soft coking coal, which Whitehaven mostly produces.
“The forward curve is rising by the day, and that is reflective of the underlying tightness that is there and I think this will go on for some time,” he said.
Mr Flynn also pointed to the imminent start of the cyclone season in Queensland – where most of Australia’s coking coal is mined – and the winter freeze in parts of China, both of which can interrupt supply of coal to Chinese steelmakers.
“All these things contribute to what’s going to be a tight period over this summer season for us and their winter,” he said.
The price rally has been built on a range of coal supply cuts and interruptions which have made it much harder to source coal shipments.
The biggest factor has been China’s decision to limit the number of days that its domestic coal mines can work each year, in a bid to reduce pollution and improve the profitability of the sector.
Mr Flynn said those production limits were “sensible”, and they had effectively signalled a floor would exist in the thermal coal price around $US85 per tonne, rather than the $US47.27 per tonne where the price slumped to in January.
“Their objective here is to remove unprofitable, low quality, unsafe tonnes from their market, and they have obviously shown you what sort of price environment they need in order to make their industry sustainable so that is a very good signal for our industry,” he said.
The spot price for thermal coal shipped from Newcastle in New South Wales was $US109 per tonne on Tuesday.
Despite Mr Flynn’s optimism, analysts at Macquarie said this week that coal prices should start to slide soon as more supply came into the market.
The analysts said Chinese railway data suggested coal movements were back to levels seen before the production limits were installed, plus Glencore has announced plans to restart production at two shuttered mines in Australia.
Whitehaven shares have risen almost nine-fold since February, and Mr Flynn said the improved profit margins would be used to pay down debt and potentially resume dividends in 2018.
Thermal coal can be sold at better prices as “semi-soft coking coal” after being washed. Whitehaven has vowed to sell about 50 per cent of coal from its Maules Creek mine into semi-soft markets within five years, but Mr Flynn said on Tuesday that target would be achieved faster, and up to 80 per cent of product from the mine could be sold as semi-soft.