Tue, April 11, 2017 8:40 am

Hans, Andy, Charles, Dianna, and Jack joined Steve Ristevski in New York City for a week packed with meetings with premium clients and the New York Coal Trade Association’s 104th annual banquet and its subsequent Friday seminar, which included a presentation by Corsa Coal’s CEO George Dethlefsen. Please see our key takeaways from the week below:


  • Sentiment: We note that the sentiment among the coal community has been buoyed with the five-year high prices. Behind the bullishness is the met coal supply tightness, which is expected to prop up the thermal markets, and general Chinese supply policies that should be more favorable compared to years past.  However, there are just as many looking “beyond the storm” asking about the long-term equilibrium price in the met markets and what happens when the Queensland ports return to full operations.


  • All Eyes on the Met Market: The industry and its investors remain intensely focused on the met market and the aftermath of Cyclone Debbie.


  • $300/MT Coking Coal Cargoes?: Word was spiraling around New York City that some coking coal cargoes are trading hands not far from the $300/MT level. We suspect these prices are coming from China, Japan, or South Korea, but we understand the Europeans are also paying strong premiums for coking coal. Coking coal suppliers in the U.S. have already locked in very profitable transactions since Cyclone Debbie hit.


  • Premium Iron Ore in Strong Demand: Prices of premium iron ore qualities are on the rise as steel mills are trying to reduce their met coal/coke costs by using a greater percentage of iron ore and smaller percentage of coke inside their blends. It’s not clear to what extent this practice can be leveraged, but it’s worth keeping an eye on.


  • George Dethlefsen/Corsa Coal: George Dethlefsen was excited to talk about Corsa’s new Acosta deep mine, which will be online and producing coal in about six weeks. Dethlefsen also shared some other company objectives and reasons for his heavily bullish outlook.


    • China is Not a Low Cost Mining Jurisdiction: Specifically for coking coal, China is not a low-cost producer. Last year’s workday policy was primarily just a stealth bailout of the country’s financial system, which had many bad loans outstanding to coal producers. Dethlefsen also noted that Shanxi province’s stated breakeven coking coal price netbacks to a $146/MT FOB Australia price.


    • Cyclone Debbie Impact: Dethlefsen estimates 15 mm MT of coking coal supply will be lost in 2017 due to Cyclone Debbie, but he conceded that North American met export growth may be equally large. It was also noted that steel demand growth could lead to an increase of 28 mm MT of coking coal demand using a 3% YoY steel growth rate.


    • Benefitting from Cyclone Debbie: Dethlefsen is directing his sales team to take full advantage of the Cyclone by not just being a ‘pinch hitter’ but rather becoming a regular coal in its clients blends. One of the biggest challenges is creating a trust in the specific coal quality, but Debbie presents an important opportunity nonetheless.


    • 2017 Market Dynamics: It’s predicted 2017 will continue to bring more M&A, IPO’s and equity offerings, and the rise of financial hedging in coking coal (driven by increased liquidity and the need to offset large price swings). Some key unknowns of 2017 include the length of the rail outages in Australia, steel demand growth (each 1% of crude steel production growth adds 10 mm tons of met coal demand), the ability for exporters to hit their targets, and whether contracts will be honored.


    • New Supply Entering the Market: All of the low hanging fruit (additional capacity) has already been picked. The quick wins by way of increasing production to six or seven days per week has already been implemented. To add production, a supplier must open a mine which can take up to eight months. Another pertinent question is the capability of the railroads to support additional supply, though Dethlefsen noted that they have not yet experienced any issues.


    • M&A Appetite: Dethlefsen expressed his eagerness to reenter the M&A arena and expects to complete another deal within the next 12 months. Though he likes the low-vol niche they’re currently serving because it’s in very high demand globally, they would consider other qualities as well as geographic diversification, possibly even outside the US. He added that while capital markets have opened, they may have to employ some creative deal structuring to get something done.