Material Matters: Coal, Iron Ore And Oil

Commodities | Sep 16 2021

A glance through the latest expert views and predictions about commodities: coal; iron ore; and oil

-Tight seaborne coal market underpinning robust prices
-Volatile iron ore prices, yet miner cash flow remains solid
-Will OPEC move to balance the market in 2022?

By Eva Brocklehurst


The seaborne coal market has tightened significantly. Demand is surging as global power consumption recovers along with steel production. Supply challenges in South Africa, China and Mongolia as well as Australia relating to the pandemic have aided tightness.

Hence, Goldman Sachs upgrades benchmark price forecasts for both thermal and metallurgical (coking) coal. Benchmark thermal coal is expected to hit US$190/t in the December quarter and average US$137/t in 2022 while metallurgical is expected to average US$230/t in the December quarter and US$175/t in 2022.

Specifically, thermal coal exports from key producers were up 8% on average in May and June, largely because of a rebound in exports from Indonesia, yet as Goldman Sachs points out, Australian exports set the benchmark and exports from Australia, South Africa and Colombia were down. Meanwhile, on the import side, volumes were up 16% in June amid demand from South Korea, Japan and China.

For metallurgical coal the rally in prices have been driven by a decline in China's domestic production along with lower exports from Mongolia, Australia and the US. Demand has strengthened in Japan, Taiwan, India and South Korea. Goldman Sachs expects metallurgical coal prices will ease back in the December quarter as China makes cuts to its steel production and supply recovers in Australia.

The broker retains a Buy rating for Whitehaven Coal ((WHC)) and pure metallurgical coal operator, Coronado Resources ((CRN)), as well as diversified miner South32 ((S32)). New Hope Corp ((NHC)) is downgraded to Neutral on valuation.

Iron Ore

Following maintenance during July and August at Port Hedland, Australian weekly shipments of iron ore have increased. Volumes for BHP Group ((BHP)) increased 15% while Rio Tinto ((RIO)) rose 8.4%. Macquarie notes this offset sequentially by lower volumes from Fortescue Metals ((FMG)).

The combined shipping rate for the three in September to date has rebounded above the 800mtpa level. On the other side of the Pacific, Macquarie notes shipments from Vale have trended lower because of low throughput at one of its mines along with port maintenance work.

The broker notes the iron ore price has been volatile, having recently breached the US$130/t low point registered in mid August. Yet the miners are still enjoying bumper cash flow and at spot prices free cash flow yields for the majors remain in double digits.

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