Coking Coal, another strong year ahead

Coal Update

Coking Settles, Thermal Close

Coking Coal Details of Agreement ¡X BMA and Posco have settled JFY2008 coking coal prices at $US300/t - $US305, above our forecast of $US285/t.

Benchmark Settlement ¡X BMA is the largest coking coal exporter and Korea's Posco is the fifth-largest steelmaker. This will be the benchmark coking coal settlement.

PCI & Semi Soft ¡X The fundamentals of low vol PCI are even tighter than hard coking. While some producers are calling for prices above those of coking coal, we think price settlements in the range of US$200-250/t are most likely.
Similarly prices of semi-soft coals are likely to break out of the normal bounds
of traditional relationships with other coals and settle above US$180/t.

Thermal Steaming Ahead ¡X A potential settlement between Chubu and Xstrata for $US125/t would also constitute a benchmark. This would be above our forecast of $US110/t.

Queensland's Supply Situation ¡X Fundamentals in seaborne coal markets are positive in the short, medium and long-term. However floods in Queensland, power crisis in China and South Africa amplified upward pressure on prices this year.
Total production losses in Queensland are likely to be at least 15Mt
(11Mt of metallurgical coal and 4Mt of thermal coal). In recent days however,
the supply of hard coking coal is starting to improve with a resumption of
exports from China and a recovery in Australian exports. This is allowing the
JSM to rebuild inventories from critically low levels.

China ¡X In China, export licenses will be issued for 53Mt in 2008. The first
quota instalment for 2008 of 31.8Mt was 29Mt thermal and 2.8Mt met coal.
This implies that maximum thermal coal exports are likely to remain
unchanged at around 48Mt.

South Africa ¡X In South Africa, Eskom will buy another 45Mt of coal over two years to rebuild stockpiles. Some of this may be diverted from export markets.

Peak Prices ¡X We expect a moderation in prices (albeit at historically elevated levels) in JFY2009 and expect coking coal to pull back to $US200/t and thermal to $US80/t.