Record coal prices a boost to producers but not consolidation, consumers: analysts
Sat Apr 19, 1:54 PM
Romina Maurino, The Canadian Press
ca.news.finance.yahoo.com
By Romina Maurino, The Canadian Press
TORONTO - Canadian coal producers will enjoy the benefit of high coal prices for the coming year as those soar to record levels, but while the increases will give producers' projects a boost, it won't lead to the takeover frenzy that has consolidated the iron, steel and base metal sectors.
And while producers will benefit, consumers are likely to feel the impact of higher coal prices in everything from utilities, to cars and construction.
Rising demand from Asian steelmakers and production hiccups in coal-producing countries like Australia, China and South Africa have constrained supplies of both thermal coal and the metallurgical coal used in steel production, leading to a sharp increase in global prices.
Metallurgical coal settled at US$305 per tonne for the year, which runs from April 1 to the following March - about 200 per cent higher than it was last year. Thermal coal, used for power plants, is currently hovering around $120 to $125 a tonne.
"The rainy season in Australia, where a lot of this coal comes from has, interrupted the flow of coal to China and India, so you have this perfect storm happening: excellent demand that's growing and then you get a little bit of a speed bump in terms of the supply," said Jennings Capital analyst Ron Coll.
"The existing production is going to enjoy the ride, because these are wonderful prices for all coal producers, particularly the Western Canadian coal producers."
But while a strong commodity environment and high Chinese demand drove many of the steel industry mergers that transformed the Canadian mining landscape over the last few years - leading to the buyout of iconic producers Inco, Falconbridge and Alcan - Canada's coal companies aren't expected to face the same fate.
"The assets are relatively unappealing to a BHP or an Anglo American or a Rio Tinto or Vale, the big players in the coal business, (since they) can look at 50 and 100-year projects in Australia," Coll said.
Any short-term consolidation merger or acquisition activity, he said, will take place in Australia, where the resource potential of deposits are much larger.
Ian Howat, an analyst at National Bank Financial (TSX: NA.TO), said some Canadian coal producers will also deter foreign investors because of their high production costs.
"I think (foreign buyers) will probably try to come in more as joint venture partners than taking them over aggressively, particularly (since) all these guys have run up in prices recently," Howat said.
On the individual level, the price increases might give investors in coal-producing companies a boost, but it also means higher costs for heating and several goods.
"There will likely be some pass-through from the surge in coal prices," said TD economist Derek Burleton.
"Coking coal is largely used in steel production, so it's an input into manufactured goods, so the impact would certainty hit consumers, but it would be more of an indirect channel - price being passed on down the chain,"Burleton said.
"(Steel) is quite ubiquitous in construction, in autos - it's a very important commodity."
"How much they pass through depends on the final market conditions, (and since) globally we're looking at a weaker growth... it will limit the extend to which input price increases can be passed through."
The rising coal prices has led to increased activity in the sector in Canada.
Certain companies are looking to re-open production at old mines to benefit from the higher prices: Xstrata Coal Donkin Ltd., a subsidiary of Xstrata PLC, and Erdene Gold Inc. (TSX: ERD.TO) are looking to re-open the Donkin project in the northeast of Cape Breton Island to sell its coal to the domestic market and export thermal coal power generation.
Sherritt International Corp. (TSX: S.TO), announced it was buying back the outstanding units of Royal Utilities Income Fund (TSX: RU-UN.TO), owner of Canada's largest thermal coal producer, in a $704 million deal that will allow it to invest more money in its coal business.
Coalcorp Mining Inc. (TSX: CCJ.TO) rejected a takeover offer by Switzerland-based advisory firm Pala Investments AG, which argued some of the company's upside had been capped because of contracts they had entered into.
Fording Canadian Coal Trust (TSX: FDG-UN.TO), which has been thinking about putting itself up for sale, said in February railway and port shortcomings stalled its attempts to get its coal to market, and was also facing currency shifts and rising costs. Teck Cominco Ltd. (TSX: TCK-B.TO), which already owns almost 20 per cent of the trust, seems likely to buy the rest, although high coal prices may make a Canadian buyout more difficult.
No one knows for sure how long prices will remain at these levels, but to Coll, the outcome of the new metallurgical coal contracts next April will depend the outlook for the Chinese and Indian economies.
"If you still believe that those economies are going to very well over the next 12, 24, 36 months, then we're likely going to see coal prices go up another notch," Coll said.
TD's Burleton said that while coal prices are likely to remain strong this year, coal, like all commodities, is not immune the possible impact of a general economic downturn.
"The U.S. is in recession and the link between the U.S. consumer and the emerging markets is quite a strong one," he said.
"I don't think we've seen the knock-on effects of the U.S. play out as of yet." |
