Macquarie Research, Commodities - Rebalancing the thermal coal market

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Commodities Comment
Rebalancing the thermal coal market
 In this note we estimate the impact of the significant shifts in seaborne
thermal coal markets stemming from the Japan natural disasters and the flowon
effect on gas pricing and nuclear policy, particularly in Europe. Overall, the
balance hasn’t been overly affected, although more demand has been shifted
to the Atlantic.
Latest news
 Base metals were muted in Thursday trade, while gold hit a new nominal high.
But the strength of silver (3.3%) and palladium (2.6%) suggested that
investors weren’t in a gloomy mood, despite the growing likelihood that
Portugal would require funding from the European Financial Stability Facility.
 BHP Billiton announced a number of approvals on Thursday. The biggest
news was in iron ore, where confirmation of the Pilbara expansions was
announced. While this was expected, the headline figure is now 220mtpa of
exports (with debottlenecking to 240mtpa), ~10% lower than the 240mtpa
baseline figure we had previously been modelling. First production from the
new Jimblebar mine is expected in 2014. This reinforces our view that iron
ore projects continue to be difficult to execute and that the ongoing seaborne
market undersupply will necessitate high volumes of Chinese domestic ore
production for longer than the market generally expects.
 The flash Manufacturing PMI data for Europe fell to 58.9 from 61.4 earlier in
March, suggesting that growth remains solid for the region as a whole. Flash
PMI data from HSBC/Markit for China picked up to 52.5 from 51.7, with this
series seasonally adjusted.
 The SHFE lead contract started trading on Thursday. The total volume traded
was ~73,000 lots, and open interest at the close was equal to ~112,000t. We
continue to think that the lead market looks solid from a fundamental
perspective, although not for reasons related to the earthquake in Japan, but
rather due to ongoing consumer-driven growth in China (and clear potential
for this to continue into the medium term) coupled with potential supply-side
constraints. Also, it is reflected in positive price signals from physical markets
at different points along the supply chain.
 Transnet has announced an increase in rail tariffs, with rail costs to Richards
Bay rising by 30% from 1 April. This will push average rail costs to R117–130/t.
 The seaborne market for manganese ore is splitting along quality lines. On
the one hand, the balance in the market for higher-grade ores, primarily from
Australia, Gabon and South Africa, is becoming tighter. On the other hand,
the balance in the market for lower-grade carbonate ores, mainly from South
Africa, is currently soft, and China's port stocks are reported to be
high. However, high stocks may not be as bearish as might appear to be the
case at first glance, not the least because much of this material may include
lower grade ores. Meanwhile, spot prices for South Africa carbonate ores
sold into the Indian market are reported to have fallen below $5/dmtu
CIF. Although this is a bearish level, it is probably cutting into the top of the
industry cost curve, potentially limiting downside risks, especially with steel
production in China now running at record levels. We continue to think prices
for all manganese ores will be bid up once more in the coming months.