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Morgan Stanley Coal Price Outlook
Mar 27, 2015 10:36CST
Morgan Stanley put out its Global Metals Playbook this week, and things weren’t looking so great for many of the metals and commodities mentioned in the report.


Thursday March 26, 2015, 4:30pm PDT
By Teresa Matich+ - Exclusive to Coal Investing News
Morgan Stanley put out its Global Metals Playbook this week, and things weren’t looking so great for many of the metals and commodities mentioned in the report. Unfortunately, thermal and metallurgical coal were not spared from that outlook. 
For starters, Morgan Stanley suggested that the main pressure on coal and iron ore was coming from “the relentless expansion of Australia-centric supply,” earlier in the year, but that the problem now is a “clear loss of confidence in China’s industrial sector.”
“ [A]bating demand growth [in China] is undermining seaborne-linked prices too,” the report read. Furthermore, the firm stated that China is investing heavily in domestic production capability and lower cost distribution for thermal coal, dampening the country’s “large and crucial import demand.”
Normally, seasonal demand is expected to pick up in China earlier in the year, but as Morgan Stanley notes, the shift hasn’t happened yet. That means that prices for metals and bulk commodities are missing out on key support from the country.
Metallurgical coal
As the report stated, metallurgical coal prices have been under pressure so far in 2015. At times, weight on coking coal prices can be attributed to the commodity being mistakenly painted with the same brush as thermal coal by traders and hedge fund managers. However, Morgan Stanley sees the collapse in crude oil prices, a falling Australian dollar and weak import demand from China as drivers behind met coal price weakness at the moment. So far, hard coking-coal prices have fallen by $10 per tonne to US$100 per tonne FOB.
On the bright side, it pointed to production cuts that were announced in 2014 on the back of those factors. According to its estimates, roughly 25 Mtpa of cuts occurred, lowering growth to 1 percent year-over-year. Furthermore, a BHP Billiton (NYSE:BHP) Mitsubishi (TYO:8058) alliance made a Q2 deal with Nippon Steel (TYO:5401) for top-grade hard coking coal at US$109.5 per tonne FOB, a premium to the current spot price.
“The deal became a benchmark when Rio Tinto (NYSE:RIO) and Anglo American (LSE:AAL) reported similar deals in the following days,” said Morgan Stanley. “The fact that these deals were executed at about a $8/t premium to the equivalent spot price reflects the premium that Japan is willing to pay in order to secure supply.”
Still, the firm suggested that the fact that BHP is re-engaging in quarterly negotiations rather than sticking to its terms “suggests that it has surplus material to ship into the market.” Overall, it brought its forecast for hard coking coal prices down 16 percent to $109 per tonne for 2015.
However, in the long term, the firm has kept its forecasts constant, calling for prices to hit $118 in just two years.
Thermal coal
The thermal coal market actually saw some positivity recently, with Glencore Plc (LSE:GLEN) announcing on February  26 that it would cut its exports by 15 million tonnes amidst rampant oversupply in the space. Prices went up by $5 per tonne over the next few days and sentiment improved in the space. However, as Morgan Stanley noted, those cuts alone were not enough to keep upwards momentum going for thermal coal prices.
“While Glencore is the world’s largest exporter of thermal coal, the 5Mt cut represents only 1.5% of the world’s 940Mt global trade,” stated the firm. “The market very quickly filled the supply gap, so prices have since retraced.” Interestingly, Morgan Stanley stated that some believe Glencore’s cut was a tactic to increase price tension ahead of negotiations for contracts with Japanese utilities. In China, it sees growth slowing over the medium term in part due to increased investment in alternative power sources.
However, it wasn’t all bad for thermal coal. Morgan Stanley explained that while China and India have managed inflation by putting a cap on electricity prices, their markets have grown drastically, making those policies difficult to maintain. “Now, their governments are exploring the creation of fuel/electricity markets, which promises both higher coal prices (since they are currently capped) and greater seaborne trade,” the report read.
Morgan Stanley has kept its forecast for thermal coal prices relatively neutral, lowering its 2015 prediction by about 3 percent to $62 per tonne. To be sure, coal investors will continue to hope for production to come out of the market to abate oversupply.
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
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