Disruptions at two Coal Market major coal operations over the past week have raised concerns about inadequate supply amidst increasing demand, sparking a rally in ASX-listed mining stocks.
READ: Kristin Cavallari Spills the Tea on Her Hottest Hookup – Prepare for a Surprise!
Coal Market
Underground fires at Anglo-American’s Grosvenor mine in Queensland and Allegheny Metallurgical’s Longview mine in West Virginia have halted production at both sites. These mines together contribute about 2.5% of the hard coking coal export market.
These underground fires could lead to an earlier tightening in the physical coal markets.
Reports of these incidents caused Australian coking coal futures to surge up to 12% to $US261 per tonne this week, with prices settling around $US245.50 per tonne on Friday.
The strengthening prices have fueled a rally in coal stocks, which have been largely ignored by environmentally conscious investors.
Whitehaven Coal and Yancoal surged 17.3% and 10.7% respectively this week, with both stocks reaching new 52-week highs on Friday. Meanwhile, Coronado Global Resources jumped 13.5%, and Stanmore Resources climbed 12.2%.
“Recent underground fires are further denting supply and may help bring about an earlier tightening of the market balance,” said Morgan Stanley analyst Sara Chan. “We see a near-term opportunity in coking (or met) coal, especially after the recent share price pullback.”
Morgan Stanley, which recently made metallurgical coal its top commodity pick, predicts that prices will rise another 15% by the end of this year to $US290 per tonne.
This expected increase will be driven by a rebound in Indian demand following a slowdown in industrial activity due to the country’s elections, which has led to an increase in port inventories.
While Indian Prime Minister Narendra Modi’s narrow victory initially raised concerns about his ability to pass large infrastructure projects, Morgan Stanley said these fears were overstated.
“Our global economists see continued momentum in infrastructure and manufacturing, with major rail corridors at the heart of India’s economic revival,” Ms. Chan said.
The broker also suggested that markets are underestimating the supply constraints for met coal in China due to the country’s persistent safety controls and limited capacity to build new mines.
Additionally, exports from Australia, the world’s largest exporter, have been declining annually since 2019 due to reduced investment in the commodity.
Analysts had initially expected a rebound in Australian supply this year due to the typically milder El Nino weather pattern and the ramp-up and restart of several mines. However, exports, down 2.2% so far this year, have fallen short of projections due to adverse weather, rail maintenance, and guidance downgrades from miners.
Morgan Stanley believes Yancoal and Whitehaven are best positioned to benefit from an extended rally in coking coal prices, alongside Teck Resources before it sells its met coal assets to Glencore. The broker has an “overweight” rating on all three stocks.
The recent rise in coal shares was welcome news for Glenmore Asset Management, which increased its holdings in Whitehaven, New Hope, and Stanmore Resources during the sell-off in March.
Coal prices had been hit earlier this year by concerns over weak steel demand in China due to the country’s ongoing property crisis and the seasonal strength in supply.
However, as prices begin to recover, Glenmore’s portfolio manager, Robert Gregory, believes coal stocks have been overlooked by investors due to the strong performance of technology companies.
“The really attractive part about all these coal stocks is that even at a reasonably low point in the price cycle, they’re still generating very material profits and paying dividends,” Mr. Gregory said.
“So the set-up is really positive in that when we get a recovery in coal prices, which I think is inevitable at some stage, then they’re poised to produce some very good earnings and hopefully get a re-rating as well.”
