Coal may extend gains in H2: Report

Coal prices may rise from record levels in the next six months as demand grows and China curbs exports, boosting profits for producers such as Xstrata Plc, BHP Billiton and Anglo American Plc, a survey of analysts showed as reported by Bloomberg.

Prices for South African thermal coal used in power plants will probably be 6 percent higher than in the past six months, according to the median estimate of six analysts surveyed by Bloomberg News. Australian coal prices are likely to be about 4 percent higher, eight analysts predicted.

``Producers will benefit from higher demand,'' said Evy Hambro of Merrill Lynch & Co., who manages the $1.3 billion World Mining Fund in London, including shares in Xstrata, BHP Billiton and Anglo American. Less than one-sixth of the 3 billion tons of thermal coal consumed each year is traded internationally.

South African and Australian producers, which account for two of every five tons of exported coal, are selling fuel at record prices, boosted by congestion at Australia's Newcastle port and South Africa's Richards Bay, the two-biggest coal-export harbors. At Newcastle, ships waited more than three weeks to load coal in March, before the introduction of a quota system for shippers reduced the delays to a few days, analysts said.

South African coal prices have gained 50 percent this year and Australia's are 53 percent higher. Demand for exported thermal coal will rise about 5 percent this year, according to McCloskey Group, a coal-industry consultant. That's higher than the Organization for Economic Cooperation and Development's growth forecast of 3.4 percent for its 30 member nations.

Producers expect to ship about 64 million tons from Richards Bay this year, down from a record 68 million tons last year, said John Howland, an analyst at Hampshire, U.K.-based McCloskey.

Coal accounts for two-fifths of London-based Xstrata's pretax earnings before interest and 10 percent for London-based Anglo American, according to estimates from Goldman, Sachs & Co. Melbourne-based BHP Billiton gets 4 percent of its EBIT from thermal coal, and energy brings in about 8 percent of London-based Rio Tinto Group's EBIT, the New York-based bank said.

``Our view on coal prices in particular, and commodities in general, is that there will continue to be upward pressure,'' said Alan Miller, Johannesburg-based chief executive of Stanlib Asset Management, who helps manage about $24 billion in assets. Anglo American and BHP Billiton make up 40 percent of the holdings in the Stanlib Resources Fund.

Not all of the gains in spot coal prices will translate into higher profits for producers, which often sell on long-term contracts that protect them from volatility. Coal from Richards Bay that currently sells for about $60 a ton traded at half that price a year ago.

Xstrata sells about 40 percent of its Australian coal and about 50 percent of its South African production at spot prices, said Peter Coates, chief executive of Xstrata's coal unit. The company is seeing lower costs for shipping delays in Australia and more stable currencies, he said.

``Prices will stay strong well into 2005,'' Coates said. ``We're not seeing any signs of weakening.''

Thermal-coal demand is rising in part because steelmakers are blending it with higher-cost coking coal, said Charles Kernot, a mining analyst at Seymour Pierce Group Plc in London. Production at the Pinnacle coking-coal mine in West Virginia was idled in September after a lightning strike disrupted ventilation. Some output returned in April.

``Demand is extremely strong and we have absolutely no trouble in placing our export coal,'' said Bob Cameron, managing director of Centennial Coal Co. The Sydney-based company supplies 40 percent of the coal burned at power plants in New South Wales, Australia's most-populous state.

Indonesia, the second-biggest coal exporter, may boost shipments in the second half to capitalize on record-high prices. The nation will supply as much as 100 million tons this year, about 10 million tons more than last year, Japanese newsletter Tex Report said.

``At those kind of levels, it's amazing how the coal starts to flow out of Indonesia,'' said Clyde Henderson, director of Energy Economics Pty., a Sydney-based coal consultant. ``A lot of the time it's really just a matter of actually throwing in a few more diggers and a few more trucks.''

That may not make up for an expected decline in supplies from China, the third-biggest exporter. Macquarie Bank this month told clients the market expected a ``collapse'' in Chinese coal exports starting in the second quarter.

Power shortages hit 27 of China's 32 provinces and municipalities in the first quarter. With three-quarters of the nation's electricity coming from coal-fired generators, China may use more of the fuel domestically.

``Right now, you'd have to say there is a good probability of some further price rises with next year's contracts,'' said Tony Haggarty, managing director of Excel Coal Ltd., a Sydney-based exporter of thermal and coking coal. ``I'd say people ought to be able to get close to $55'' for a second-half average. (*)