Mozambique and Mongolia troubles bode well for local producers
Rio Tinto's shock $US3 billion ($2.87 billion) writedown of its Mozambique coal assets 10 days ago has dimmed expectations of a fast ramp-up of its mines there. Rio bought the assets from Riversdale Mining in late 2011 for $US4.2 billion. Rio has reportedly given assurances to the government of Mozambique it will not sell out of the country, but its plans are uncertain.
The UBS commodities analyst Tom Price said yields from Mozambique's coal seams were about 50 per cent lower because of their high clay load.
"The Riversdale assets seem to have even more [clay] than usual," he said. "That's problem one. Problem two is you have to build a lot of washing infrastructure to process Mozambique coal because it does have a lot of interstitial clays. Problem three is infrastructure: once you've dug it up, and washed it, you've got to get it out of the country.
"There's lots of frustrations in developing coal there. But once you wash it out, it's a good quality met [metallurgical] coal. It's not semi-soft or PCI, it's a semi-hard coal. People have done a lot of work on it and established that the specs are high quality and it would get a good price in the seaborne market."
Mr Price said Mozambique was well located to ship coal to Asia and Europe and, businesswise, was one of the safest countries in Africa. But it would be years before the infrastructure challenges were overcome and the nation was producing significant tonnages. Last year, total output was only about 2.5 million tonnes and UBS forecast that would increase to 10 million by 2015 and 22 million by 2020.
"I'm not a big bull on the growth story in Mozambique," said Mr Price. "I think it will take longer than people expect."
UBS is yet to revise its Mozambique production targets in the wake of Rio's writedown, as plans there are under review, but Mr Price said there definitely was "downside risk to supply growth".
Mongolia delivered about 17 million tonnes last year and UBS expects this will double by 2015 and rise to 42 million tonnes a year by 2020. Mr Price expects met coal prices, presently about $US165 a tonne, will fall from an average of $US168 this year to $US160 per tonne next year as supply grows from Mozambique and Mongolia and as production recovers in the Bowen Basin. UBS has a long-term nominal met coal forecast of $US150 per tonne to 2017-18. "If Mozambique underperforms the delivery of coal into the market," Mr Price said, "then there's upside risk for met coal prices. That's good for higher-cost met coal producers like the Australians which are at the top of the cost curve.
"The other beneficiary of a failure in Mozambique is US coal producers. They're at the margin of the seaborne trade geographically, and also at the top of the cost curve. So the Aussies and the Americans would be very happy at the moment. There's a little bit more security about their medium-term outlook."
Mr Price said Mongolia also faced infrastructure challenges, particularly building railways to China. "They're just not getting approval for that. That's a big risk, that might not come through. There's a real conflict in that country for the government. They want the wealth from these new mining operations but they don't like foreigners walking around their country digging stuff up there. They definitely don't like these minerals being shipped to China ... It's probably going to restrict the supply growth."
Frequently Asked Questions about this Article…
Uncertainty about coal production from Mozambique and Mongolia can tighten seaborne supply and push metallurgical coal prices higher. UBS notes downside risk to supply growth from those emerging provinces, so if Mozambique or Mongolia underperform, there’s upside risk to prices — which matters for investors tracking coal-sensitive companies.
Rio Tinto’s shock $US3 billion ($2.87bn) writedown on its Mozambique coal assets highlighted quality, infrastructure and execution risks in the region. Rio bought the Riversdale assets in late 2011 for about $US4.2bn; although it has reportedly assured the Mozambican government it won’t sell out, the writedown signals plans are uncertain and slower production than expected — a factor investors should watch.
UBS analyst Tom Price says Mozambique coal seams have a high clay load that cuts yields by roughly 50%. That requires substantial washing infrastructure and creates logistics challenges to get washed coal to port. The extra processing and transport increase development and operating costs, even though the washed product can be high‑quality semi‑hard metallurgical coal.
UBS estimated Mozambique output at about 2.5 million tonnes last year and forecast increases to around 10 million tonnes by 2015 and 22 million tonnes by 2020. However, the UBS analyst cautioned these targets face infrastructure and execution hurdles and said it could take longer than many expect.
Mongolia produced roughly 17 million tonnes last year. UBS expects that to roughly double by 2015 and rise to about 42 million tonnes a year by 2020. The key risk is infrastructure — especially approval and construction of railways to China — plus political tensions over foreign mining and export arrangements, which could restrict supply growth.
UBS cited current met coal around US$165 per tonne and forecast an average of US$168 this year, easing to about US$160 next year, with a long‑term nominal forecast near US$150 per tonne to 2017–18. Those forecasts could be revised higher if Mozambique or Mongolia underdeliver, creating tighter market conditions.
Higher‑cost metallurgical coal producers — notably many Australian miners and marginal US seaborne suppliers — would benefit from tighter supply because they sit toward the top of the cost curve. If new low‑cost supply underperforms, prices rise and improve the medium‑term outlook for these producers.
Although Mozambique is well positioned to ship to Asia and Europe, UBS’s own forecasts (10Mt by 2015, 22Mt by 2020) assume major infrastructure build‑out. The UBS analyst warned it will likely be years before infrastructure challenges are resolved and production reaches significant tonnages — potentially longer than many investors expect.
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