Xstrata points to thermal coal recovery

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".

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."