![Paul Flynn CEO of Whitehaven coal after the companies AGM, at the Sydney Mint, on 25 October 2017. Photo:Jessica Hromas Paul Flynn CEO of Whitehaven coal after the companies AGM, at the Sydney Mint, on 25 October 2017. Photo:Jessica Hromas](/images/transform/v1/crop/frm/silverstone-feed-data/23c27617-6246-49c8-b93f-6fb7dee3d1cb.jpg/r0_0_729_410_w1200_h678_fmax.jpg)
![NCH NEWS
Newcastle Coal loader at Kooragang Island
11th June 2010
NCH NEWS PIcture by DEAN OSLAND SPECIAL 00000001 NCH NEWS
Newcastle Coal loader at Kooragang Island
11th June 2010
NCH NEWS PIcture by DEAN OSLAND SPECIAL 00000001](/images/transform/v1/crop/frm/silverstone-feed-data/a1d15a9c-db6c-42ac-99e6-2dbdb6ce9c10.jpg/r0_0_729_485_w1200_h678_fmax.jpg)
Did the doubters declare the death of thermal coal too soon?
Certainly the major listed Australian thermal coal miners have all seen positive movement in their share price from late 2017 through into 2018, bucking the wider perception of a market in decline.
That was in turn driven by a resurgent thermal coal price after its massive bust three years ago.
From August 2015 to August 2016, prices languished below $US60 ($75) a tonne. By October of last year that had spiked to more than $US100 a tonne in October 2016 and remained in a healthy range rarely falling below $US80 a tonne.
There are combination of international and domestic market factors as well as smarter play by Australian miners that have created market conditions where thermal coal has regained ground, shaking off the zombie company taglines that have dogged the industry over the last year.
The domestic market is also different. Australia has significantly fewer thermal coal miners today than it did five years after a spate of sell-offs, divestments, and exits from the market, and now those who survived are reaping the benefits of a strengthening market.
But can it keep up the pace of recent months, or will this run peter out?
The players
Whitehaven Coal has been one of the standout performers.
In February of 2016 Whitehaven's share price hit 37 cents. Earlier this month it hit $4.77 only slowing down on the back of lowered production guidance figures last week.
"Whitehaven has managed their balance sheet well," MineLife analyst Gavin Wendt says.
Deutsche Bank forecasts a 75 per cent increase in net profit for Whitehaven after tax for 2019 spurring free cash flow levels upward by 77 per cent.
Whitehaven chief executive Paul Flynn said the demand has always been there for coal, but the price is only now catching up as less viable supply has left the market.
"Whitehaven has grown substantially over the last five years as we have invested counter-cyclically, and brought high-quality coal to the market," Mr Flynn told Fairfax Media.
While Whitehaven recently announced a lowered guidance than previously forecast, it remains bullish on the thermal coal market.
New Hope Group has seen strong movement northwards, hitting a share price high point not seen since early 2015.
New Hope chief executive Shane Stephen told Fairfax Media pinpoints the sector's turning point as May 2016, when China announced it would institute new controls on domestic production sending buyers elsewhere.
"We're seeing strong demand for higher quality Australian thermal coal in Asia, and that is what's driving the price. Additionally, we're also not seeing a material increase in supply coming out of Australia
"Prices are around US$107 from Newcastle, to put that in perspective, any price with an eight or nine in front of it is considered good," Stephen says.
"With demand at these prices, New Hope is strongly profitable. I think most coal producers in Australia will produce strong financial numbers in their first half results."
Stephen says the company is continuing to focus on expansion and gaining approvals for its Acland Stage 3 project and the possibility of bringing new coal mines in the Surat Basin online as soon as 2023.
Yancoal is also starting to chart a recovery a massive slump in its share price after it announced its intention to acquire Rio Tinto's Hunter Valley Operations and Mount Thorley Warkworth thermal coal mines.
Rio's rival, BHP, used its quarterly production announcement this week to spruik an expectation defying result for its energy coal division.
Production was up 8 per cent quarter on quarter, and up 4 per cent for the December 2017 half year from the previous corresponding period, with 14,029 kilotonnes produced during the December
Glencore has maintained its focus on thermal coal, telling Fairfax Media it is aiming to continue growth in the area, although it is still seeking to divest its Rolleston coal asset.
"We will continue to make investments in coal where it makes sense," a spokesman says.
Even an underperformer like Wollongong Coal - which recently posted a half-yearly loss of $23.7 million amid multi-million tax bills and $40 million in legal claims - has still managed to ride the wider positive sector waves, reaching a 12-month share price high in January.
Social support
Coal mining regions are welcoming this revival of the industry and the flow-on social and economic effects it will have.
"This is most definitely a positive for the Singleton region," Singleton Mayor Sue Moore says.
"The industry has been ticking upwards for the last six months, and we're seeing a turnaround, although it is slow. We expect to see this flow through to the local business sector over the next 12 months, beyond just the mining industry.
"Generally, this is [recovery of the thermal coal industry] is a positive all round."
But not all Hunter region councils were as supportive of the industry, taking a more prosaic view of sector's role in their future.
"The truth, whatever is said to the contrary, is that capital investment and long-term opportunities in traded thermal coal - which is approximately a fifth of the overall thermal coal market, are diminishing globally," Muswellbrook Council Mayor Martin Rush says.
"That doesn't mean that the Hunter's high quality and low-cost product won't experience periods of intermittent growth - including in the near-term as it displaces lower quality and higher cost product elsewhere in a demand-constrained market - or that the thermal coal industry will disappear by the end of next decade.
"It means that as a region we need to set aside the language of 'support' and 'oppose', take a greater stock of the economic fundamentals and work in a purposeful way to transition the Hunter economy to a low-carbon intensive future. If that exercise is to be done most efficiently and with the least impact on employment, it will
require using some of the enormous wealth presently generated by coal mining to diversify our economic base."
Newcastle, home of the largest coal port in the world, is looking beyond coal to future energy.
''The City of Newcastle recognises the role that coal plays in our local, state and national economy," Newcastle Lord Mayor Nuatali Nelmes says.
"The Newcastle and the Hunter Region has a proud history of coal mining, with the mining industry supporting thousands of local jobs for well over 100 years. We understand that coal will continue to be exported from the Port of Newcastle into the future; but Newcastle also has a proudly progressive history where our people demonstrate time and time again their ability to adapt with changing economic opportunity," she says.
This new opportunity is renewable energy.
"It is my vision to see Newcastle transition into a national hub for the renewable energy industry," Nelmes tells Fairfax Media.
"The City of Newcastle will continue to support the economic diversification of our city.
"Interestingly, it should be noted that mining only employs around two per cent of Novocastrians, with healthcare, higher education, research, training and professional services all employing far more Novocastrians than coal-related industries."
What's powering coal's revival?
Those companies that made it through thermal coal's recent collapse are facing a much-improved market and positive sentiment driven by energy demands
Fat Prophets analyst David Lennox says the changing face of the world's energy needs will eventually have a major impact on thermal coal, but the growth of renewables will not negate coal in the near to medium term.
"Even though we're seeing significant interest for renewables, we'll still see thermal coal power stations for a long time," Mr Lennox told Fairfax Media.
This has been reinforced by the Turnbull Government's National Energy Guarantee, an energy policy announced late last year which sees coal-fired power generation still playing a major role in Australia's energy landscape.
"However, with the growing demand in renewables the future for thermal coal is more tepid. As renewables reach a critical use thermal coal will diminish, although coal will be around for some time."
Mr Lennox says Australia's higher quality thermal coal is being sought as its lower impurities means lower emissions when burnt in power plants.
"While we don't consume significant quantities of coal in Australia, there is high demand from China and India."
Whitehaven's chief executive Paul Flynn said Australia's higher quality coal and location so close to Asian customers has given it an edge.
"Australia as a whole has done a good job rebasing its costs quickly as supply and demand has tightened," Mr Flynn said.
"What we've observed is very strong demand out of Asia fuelled by their demand for high-quality coal to fuel their supercritical power stations."
Another major Australian coal miner agreed, stating that significant growth is forecast from South East Asia.
"Thermal coal's story hasn't changed, we've always had an optimistic view of it in the medium to long-term. China's domestic consumption even reached an all-time record last year," the miner's spokesman says.
"There has been a price recovery over 2016/17, and this has been down to the removal of the supply excess."
A recent Credit Suisse analysis agrees noting that while much of the developed world is turning away from coal, there is still strong demand from South East Asian nations.
"These nations expect to add 32 to 56 gigawatts of coal-fired generation from 2015 to 2025. The high end of the range may represent increased coal demand of 150 million tonnes per annum," it says.
This is the focus for Whitehaven's Flynn. He says the coal outlook has been strong and exceeded many market expectations in the lead up to north Asia's winter period.
"A number of factors are helping to maintain these higher prices - China's draw on the seaborne thermal coal market is steady, demand for high-quality coals from South East Asia and the traditional Asian markets of Japan, Korea and Taiwan remains strong, reflecting buoyant economic conditions across Asia while a number of factors including Australian industrial relations issues and poor weather in Indonesia have limited supply response," Mr Flynn says.
"The outlook for thermal coal in the short to medium term is favourable."
MineLife's Gavin Wendt believes the combination of growth in China's manufacturing sector and "an almost surprising level of discipline and fiscal management" is aiding a thermal coal revival.
"Thermal coal is trending at its highest level since 2016," Mr Wendt told Fairfax Media.
"This is mainly driven by manufacturing activity in China having a direct impact on coal demand here."
MineLife's Gavin Wendt says Australia's coal industry has been buoyed by the economic growth of China coupled with higher gas prices during China's winter, which saw more people return to coal as a heating source.
This was further strengthened by the demand specifically for Australian coal, which has a higher energy content and fewer impurities compared to Chinese or Indonesian coal.
"Australia's coal is trading at a premium, and we've seen price increases of up to 25 per cent in the last six months," Mr Wendt says.
China's failed attempt to move from coal to gas also helped lift prices.
The Chinese government had planned to convert homes in its northern provinces to gas heating, instead of coal, to meet air pollution reduction targets. This plan was then cancelled due to gas shortages, causing a scramble to obtain coal in early December as temperatures dropped, pushing prices northwards.
Can coal maintain the pace?
Deutsche Bank believes Chinese governmental policy will impact prices, and while they remain high early on China lifting production could soon reverse these gains.
"We raise 2018 price forecasts by 10 to 15 per cent from Newcastle FOB US$81 per tonne to US$93 per tonne," DB says.
"Our forecasts remain below front-month as we believe the Chinese government will raise domestic production in accordance with its intention to lower power tariffs."
UBS has also recently upgraded its coal pricing forecasts going into 2018.
"We see a number of factors as being supportive of coal pricing in the near term," UBS investor notes stated.
"Coal is currently trading well ahead of 2018 UBS estimates.
"In thermal coal, we see prices being supported by Chinese policy which is targeting higher prices to cover the cost of structural reform. We believe the market is beginning to price in the possibility of higher coal price."
Chinese state-owned media Xinhua has also reported a likely reduction in Chinese coal production, with Chinese coal miners slated to cut around 12.65 million tonnes of coal in 2018.
This leaves a gap for Australian producers to fill.
However, not all analysts are as bullish for the year ahead.
Credit Suisse believes the market will see a slow down once the north Asian winter period is over.
There's a chance it can remain strong if Indonesian miners focus on fulfilling growing internal rather than external demand.
"We expect the coal price to soften from the current US$105 per tonne from February, as China exits winter and its slowing demand leads the global price down," Credit Suisse investor notes stated.
"For 2018, we forecast a 15 million tonne export coal surplus to suppress pricing."
It increased its original pricing forecasts for 2020 and 2021 to US$75 a tonne, as the thermal coal market is likely to be in deficit from 2019, but this is highly dependent on Indonesia restricting coal exports.
"Indonesia's stated intention is to cap output at 400 million tonnes per annum from 2019; given that output this year is projected to be 477 million tonnes per annum, we doubt such a severe cut will occur in 2019, and instead assume a cap of 450 million tonnes per annum," Credit Suisse stated.
"But if Indonesia allows output above 465 million tonnes from 2019, our forecast coal shortage may disappear.
"While a deficit from 2019 may justify a stronger price than US$75 a tonne, we doubt the price could sustain above US$80 per tonne as that would prompt a strong supply response."
The US is also posing a threat to Australian producers, as prices are now profitable enough to justify hauling coal into Canada and sending it from Western Canadian ports. US thermal coal exports are believed to have doubled from 2016 to 2017.
"Most of the new supply coming online is now coming out of the US," New Hope Coal chief executive Shane Stephen says.
Wendt believes if producers can continue to show restraint in terms of supply, prices can be maintained.
As the market now has so many barriers to entry and for existing operators to build a new coal mine, Wendt says the space will be much more controlled in its development and output levels, compared to when the bottom fell out of coal a few years ago.
"Coal miners have been more disciplined this time around, they've maintained supply discipline, they've sold off non-core assets, focused on good returns and paying down debt," he says.
He says this trend will continue.
"I don't think we'll see the price collapses we saw previously. There is a very healthy price outlook for thermal coal," he says.
"This is a new, tighter, rising market."