PRICES for Australian metallurgical coal are set to benefit from uncertainty over future production from the emerging provinces of Mozambique and Mongolia.
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."