Macquarie Commodities Comment: Met coal back on the march into 1Q

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Commodities Comment
Met coal back on the march into 1Q

Feature article
 Platts has reported that hard coking coal prices for 1Q 2011 have been settled
between the BHP Billiton – Mitsubishi Alliance (BMA) and a Japanese steel
mill. The headline figure of $225/t FOB Australia for premium material is in
line with our recent expectations, and the early settlement fits with our belief
that mills would want to reach agreement sooner rather than later to mitigate
against further weather-related risk. While the 7.7% rise takes hard coking
coal back to 3Q levels, perhaps the most interesting point is that all the talk of
monthly pricing has not come to fruition. With the market likely to tighten
further during the coming months, we see further upside in coking coal pricing
into mid-2011.


Latest news
 Base metals pushed upwards on Thursday trading, with strong gains recorded
for zinc, tin and lead as the US dollar weakened following strong global PMI
data. Platinum moved to $1,700/oz, while LME copper stocks fell another
0.7% overnight to 352,425t.

 US retail light vehicle sales for November were announced on Wednesday.
The seasonally adjusted annualized rate (SAAR) totalled 12.3m units.
Volumes rose 17% YoY, while the 12.3m unit run-rate was in line with the
previous month, which marked the best performance of YTD. This is another
positive indication that, despite stubbornly high unemployment and weak
house prices, pent-up demand is gradually bringing back customers after
months of sub-trend sales.

 The head of the pricing department at the NDRC has commented that
producers should exercise self discipline to ensure key coal price contracts
are unchanged in 2011. The NDRC’s concerns seem unlikely to affect all coal
contract prices, with no mention of spot prices. While there is some concern
about Chinese domestic prices from officials, we don't think this will be too
large a barrier to further gains in seaborne prices.

 Our China economist, Paul Cavey, recently hosted a speaker from the policy
research bureau of China’s Ministry of Housing. As a key takeaway, the
speaker highlighted in particular the strength of land sales, which she
suggested was a reliable leading indicator for housing construction in 2011
(the area of land purchased for development rose 41%YoY in October,
despite a relatively high base the year before). She expected construction to
be further supported by some recent government initiatives, especially
measures to force developers to hold proceeds from pre-sales in special
escrow accounts. Developers should then have an incentive to build more
quickly to get hold of their money. Overall, our speaker expected property
construction to grow by a healthy 20% next year, which would obviously
create further strong demand growth across the commodity space.

 Hancock Prospecting has received state and federal environmental approvals
for the railway line for their 55mtpa Roy Hill project in the Pilbara; however, no
construction will start until a feasibility study into the project costs has been
delivered.