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Weekly Broker Wrap: Thermal Coal, Oil, Gold And Banks

Weekly Reports | Aug 26 2016

Thermal coal deficit looms; output freeze in oil?; central banks and gold; Moody's puts major banks on negative outlook.

-Australian thermal coal exporters to benefit from market deficit
-Co-ordinated output freeze on oil production considered unlikely
-Central banks likely to remain net purchasers of gold
-Moody's downgrade limited in impact on major banks


By Eva Brocklehurst

Thermal Coal

The cut back to thermal coal supply appears to have been more severe than the decline in import demand, leading to a short term deficit in the market, Commonwealth Bank analysts note. They cite estimates from BP which indicate thermal coal production has contracted 4% in 2016, the largest annual decline since 1981.

China’s transition to a services economy and growing pollution concerns have meant its imports are falling while India plans to be independent of thermal coal imports and has cancelled plans for four proposed coal-fired power plants. These trends are countered by Japanese and Korean plans, in the short term, to boost coal power capacity. Japan and Korea account for 60% of Australia’s thermal coal exports.

Meanwhile, Indonesia, the largest thermal coal exporter, has experienced a contraction in exports, as loss-making supply exits the market and a preference for higher quality coal increases. Australian thermal coal exporters are expected to benefit the most in the absence of Indonesian supply because the coal is higher quality.

The analysts expect the current deficit will sustain higher thermal coal prices over the next year and upgrade forecasts by 9% to US$55/t for 2016 and by 13% to US$52/t for 2017.


Deutsche Bank notes renewed talk of a co-ordinated output freeze by OPEC and non OPEC producers. The broker cannot measure the extent to which this speculation has helped boost oil prices yet suspects the fundamental impact of any co-ordinated outcome will be minimal.

The terms of a deal are unlikely to pose upside constraints on Libya, Iraq or Nigeria and the broker suspects OPEC production could still exceed its 2017 assumptions of 33.5mmb/day in the event of agreement.

Deutsche Bank expects that after the September talks on the sidelines of the International Energy Forum in Algeria fail to provide any meaningful outcome, attention will return to the weak data sets in the US. After two weeks of counter-seasonal build up in inventory, the production side in the US looks less promising to the broker while net imports remain high.


Macquarie observes central banks were buying gold in the first half of 2016, although falling reserves in Venezuela were a drag. The broker notes there is no appetite for sales and, outside of Russia and China, not much buying.

The analysts estimate central banks bought 166 tonnes of gold and sold 22t, making a net purchase of 144t in the half. This is in line with 2013 and 2014 but behind 2015. Importantly, calculations in 2015 and 2016 exclude Venezuela.

The broker does not believe the numbers have any implications for the sector’s attitude to gold and it is unlikely Venezuela wants to get rid of its reserves. In 2016 so far there is an absence of sellers besides Venezuela.

With gross purchases over the last few years entirely down to Russia and China the concentration does pose a risk if either change policy, Macquarie contends. While there is some evidence high prices are deterring China, a radical change of view appears unlikely. Hence, the broker suspects central banks are likely to remain net purchasers of gold but at a slower rate than in the last few years.


Over the last month, Australia’s major banks have delivered a total return of 2.8% on average, outperforming the ASX200 Accumulation Index. On an absolute basis, Deutsche Bank observes the major banks’ return of 2.0% has underperformed US large cap banks, Hong Kong and UK banks.

Moody’s has placed the major bank credit ratings on negative outlook but the broker believes this will have a limited impact. While the coveted Aa2 senior unsecured debt rating may assist in raising funds offshore at tight spreads, Deutsche Bank notes the majors are currently rated one notch lower by both Standard & Poor’s and Fitch anyway.

So, the broker suspects the market has already priced the banks' senior unsecured debt on the latter two's lower rung. Deutsche Bank expects the major banks will not face capacity constraints in the wholesale markets but may face more competition from issuers in the lower rating band.

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