XSTRATA Coal chief executive Peter Freyberg has called the bottom of the thermal coal market, telling investors last week "we are seeing recovery in the markets".
During questioning after Xstrata's half-year earnings presentation in London on Tuesday, Mr Freyberg said: "I think the market probably bottomed about a month ago and there's been steady improvement over the last four or five weeks, where we've seen thermal prices increasing by $US5 or $US6 in the spot market".
Spot thermal coal prices fell dramatically in the first half but Mr Freyberg said Xstrata's output was largely contracted, with only 10 per cent unsold this year, and there would be no material impact on its earnings. Xstrata is the world's largest thermal coal exporter.
"We were able, I think, by seeing where the market was trending, to position ourselves quite well," he said. "Certainly, there are some spot cargoes out there with traders that are seeing prices lower and are having difficulty in performing but, in general, our relationship with our customers is fairly good and we're working through this."
Looking into 2013, Mr Freyberg said a recovery would be underpinned by rising oil prices and a reduction in exports from the US, where some producers were now "out of the money", and Colombia, due to industrial unrest. "We are seeing firming and, looking a bit forward, we are positive going into [the fourth quarter of 2012]".
Last week commodities analysts at Macquarie Research noted thermal coal prices appeared to have found "a degree of stability."
Stockpiles were falling, mainly due to Chinese domestic shipments being curtailed, and the analysts wrote: "The fundamentals are definitely improving, though we would suggest prices have to maintain current levels for a couple of months yet to keep supply off-line until normal stocks levels are achieved. Only at this point are domestic coal prices likely to rise to incentivise tonnes back into the market, with demand still subdued."
Xstrata last week reported a 31 per cent drop in earnings before interest, tax, depreciation and amortisation to $US4 billion ($A3.8 billion) in the June half, and announced cost savings of $US970 million and deferral of $US1 billion of spending in 2012. Asked about the future of Xstrata's proposed 60 million tonnes per annum Wandoan thermal coalmine in Queensland's Surat Basin, Xstrata chief Mick Davis said only that it remained "a very, very important component of Xstrata's growth potential going forward but it is not part of the current phase of expansion.
"From our point of view it is important for us to keep that project viable and the optionality of the project strong and at the appropriate moment to trigger the project."
Frequently Asked Questions about this Article…
Has Xstrata said the thermal coal market has bottomed and prices are recovering?
Yes. Xstrata Coal chief executive Peter Freyberg said the thermal coal market probably bottomed about a month before his comments and that the company was "seeing recovery in the markets," with spot thermal coal prices rising by around US$5–6 in the spot market over the prior four to five weeks.
Why are thermal coal prices starting to stabilise and recover?
The article cites several reasons for a recovery in thermal coal prices: falling stockpiles (partly because Chinese domestic shipments were curtailed), analysts at Macquarie Research noting a degree of stability, and Xstrata expecting longer‑term support from rising oil prices and reduced exports from the US and Colombia due to producers being "out of the money" and industrial unrest.
How much of Xstrata’s thermal coal output is uncontracted and could be affected by spot prices?
Xstrata said most of its output is contracted and only about 10% of its production remained unsold for the year, so the company expected no material impact on its earnings from spot price falls.
Did falling thermal coal prices hurt Xstrata’s earnings in the latest half-year report?
Xstrata reported a 31% drop in earnings before interest, tax, depreciation and amortisation (EBITDA) to US$4 billion in the June half. However, the company noted its output was largely contracted and suggested spot price weakness would not have a material impact on earnings.
What cost measures has Xstrata taken to respond to the weaker commodity environment?
Xstrata announced cost savings of US$970 million and a deferral of US$1 billion of spending in 2012 as part of its response to the weaker commodity cycle.
What do analysts say about coal stockpiles and the outlook for domestic coal prices?
Macquarie Research analysts observed that thermal coal prices appeared to have found some stability and that stockpiles were falling. They noted prices would likely need to hold at current levels for a couple of months to keep supply off‑line; only then would domestic coal prices be likely to rise to incentivise more tonnes back into the market while demand remains subdued.
What factors did Xstrata say could underpin a recovery in thermal coal into 2013?
Xstrata’s management pointed to rising oil prices, a reduction in US coal exports (where some producers are unprofitable), and industrial unrest in Colombia as factors that could reduce supply and help underpin a recovery in thermal coal prices in 2013.
What is the current status of Xstrata’s proposed Wandoan thermal coal mine in Queensland?
Xstrata’s chief Mick Davis said the proposed 60 million tonnes per annum Wandoan mine in Queensland’s Surat Basin remains a very important part of the company’s growth potential, but it is not part of the current phase of expansion. The company wants to keep the project viable and maintain optionality to trigger it at the appropriate time.
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