Win for Australian met coal producers
Rio Tinto's shock $US3 billion write-down 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 and paid $US4.2 billion after a bidding war. Rio has reportedly given assurances to the government of Mozambique that it will not sell out of the country, but its plans are up in the air.
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 . . . Problem three is infrastructure: once you've dug it up, and washed it, you've got to get it out of the country."
Mr Price said Mozambique was well located to ship coal to Asia and Europe and was one of the safest countries in Africa to do business. But it would be years before the infrastructure challenges were overcome and the nation was producing significant tonnages.
In 2012, 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," Mr Price said. "I think it will take longer than people expect."
UBS is yet to revise its Mozambique production targets in the wake of Rio's write-down, as plans there are under review, but Mr Price said there definitely was "downside risk to supply growth".
Mongolia delivered about 17 million tonnes in 2012 and UBS expects this will double to 35 million by 2015 and 42 million tonnes a year by 2020.
Mr Price expects met coal prices, currently about $US165 a tonne, will fall from an average of $US168 in 2013 to $US160 a tonne in 2014 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."
Frequently Asked Questions about this Article…
Rio Tinto posted a shock US$3 billion write-down on its Mozambique coal assets after buying Riversdale Mining in late 2011 for about US$4.2 billion. For investors, the write-down matters because it dims expectations of a fast production ramp-up in Mozambique, creating uncertainty around future seaborne supply and potentially supporting metallurgical coal prices if supply growth underperforms.
Mozambique faces yield and infrastructure challenges (high clay content, need for extensive washing plants and export logistics), so if production underperforms, there is upside risk for metallurgical coal prices. UBS analysts say weaker-than-expected delivery from Mozambique would be positive for higher‑cost producers, including Australian miners, by tightening medium‑term supply.
UBS flagged three main problems: Mozambique's seams have a high clay load leading to roughly 50% lower yields, significant capital is needed to build washing infrastructure to process the coal, and there are major export/infrastructure hurdles to get washed coal out of the country.
UBS noted Mozambique produced about 2.5 million tonnes in 2012 and forecast increases to around 10 million tonnes by 2015 and 22 million tonnes by 2020. However, UBS cautioned the growth story could take longer than expected because of the infrastructure and quality issues.
Mongolia delivered about 17 million tonnes in 2012. UBS expects Mongolia's output to rise to roughly 35 million tonnes by 2015 and about 42 million tonnes by 2020, contributing significantly to global supply growth and putting downward pressure on met‑coal prices if the expansions materialize.
UBS reported metallurgical coal at about US$165 a tonne at the time of the article. It expected prices to fall from an average of US$168 in 2013 to around US$160 in 2014 as supply grows, with a long‑term nominal forecast of about US$150 per tonne through 2017–18.
The article explains that Australian and US producers sit at the top of the global cost curve (they are relatively higher‑cost producers). If Mozambique underperforms and seaborne supply tightens, metallurgical coal prices could rise, giving these higher‑cost producers more price security and potentially improved margins in the medium term.
Investors should note a mixed outlook: growing supply from Mongolia and potential recovery in Australia's Bowen Basin point to some downward pressure on prices, but uncertainty and setbacks in Mozambique could tighten supply and lift prices. UBS forecasts modest price declines near term with a long‑term nominal level around US$150/t, so investors should watch Mozambique and Mongolia production updates and Bowen Basin recovery for signals on price direction.
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