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Xstrata Profit Seen at Record as Coal Surges: Freight Markets

Xstrata Plc (XTA), the world’s biggest exporter of coal burnt in power plants, will earn more than ever this year as record cargoes from Australia combine with a 32 percent jump in prices.

Shipments from Australia, the second-largest supplier after Indonesia, will rise 4.9 percent to 149 million metric tons in 2011, the government forecasts. That won’t be enough, creating a third consecutive year of global shortages, Barclays Capital estimates. Higher prices will help Zug, Switzerland-based Xstrata report an 83 percent gain in net income this year, according to analysts’ estimates compiled by Bloomberg.

“Coal-mining companies in Australia are making hay while the sun shines,” said Tim Schroeders, a Melbourne-based fund manager at Pengana Capital Ltd., which oversees about $1.1 billion of assets. “Global demand is expanding rapidly and prices are reflecting tightness in supply. Companies will be looking to sell every ton they can produce.”

Production will fall 33 million tons short of demand this year, part of a pattern of commodity shortages encompassing everything from copper to palladium, according to Barclays. That’s generating more profit for BHP Billiton Ltd. (BHP) and Rio Tinto Group and allowing Glencore International Plc to sell as much as $11 billion of shares. About $15.3 billion of merger deals were announced in coal this year, up from $9.7 billion in the year-earlier period, data compiled by Bloomberg show.

Eastern Port

Prices at the eastern port of Newcastle, an Asian benchmark, will average $131 a ton this year, compared with $99 in 2010, Barclays said in a report May 13. Global exports will advance 1.7 percent to 725 million tons and imports increase by the same magnitude to 757 million tons, the bank estimates.

The forecast for a surge in coal prices comes amid a rout in commodity markets. The Standard & Poor’s GSCI Index of 24 raw materials fell 11 percent in the first week of May, the biggest drop since December 2008. Crude oil futures traded in New York fell 15 percent and natural gas 9.9 percent.

While mining companies may be making more money than ever, the shipping companies are contending with a glut rather than shortages. Coal is typically shipped on capesizes and panamaxes, rates for which have tumbled as fleet growth outpaced demand. About 90 percent of global trade moves by sea, according to the Round Table of International Shipping Associations.

Returns for owners of capesizes, three times the size of the Statue of Liberty, slumped 71 percent this year to $5,829 a day, according to the Baltic Exchange. Rates for panamaxes, the largest commodity ships to pass through the Panama Canal, fell 8.7 percent to $13,434 a day, according to the London-based bourse, which publishes rates for more than 50 maritime routes.

Carrying Capacity

Carrying capacity in dry bulk will rise 13 percent this year, compared with a 5 percent gain in trade, according to the research unit of Clarkson Plc, the world’s biggest shipbroker. The new ships were ordered in 2007 and 2008, when rates rose to about $234,000 a day for capesizes and $95,000 for panamaxes.

“Increasing coal exports will aid freight rates but won’t necessarily make them higher,” said Jeffrey Landsberg, president of Commodore Research & Consultancy, a New-York based company specializing in bulk commodity shipping. “A massive amount of new ships were ordered and now they are being delivered, but the extra tons of coal won’t be enough to suck up all that extra capacity.”

Forward freight agreements, traded by brokers and used to bet on future transport costs, anticipate panamax rates no higher than $13,603 through 2016. Capesize returns will advance to $18,061 by then. Owners of capesizes need about $25,000 to cover expenses such as crew and financing for ships valued at $60 million, according to HSBC Shipping Services Ltd.

Capesize Rates

Shipping rates are volatile, with those for capesizes rising or falling 46 percent or more in nine of the last 10 years. Panamaxes fluctuated 48 percent or more in all except one of the last 10 years.

There are threats to the anticipated growth in demand for coal. China raised interest rates four times since October, seeking to cool consumer prices that increased 5.3 percent in April from a year earlier. Inflation has exceeded Premier Wen Jiabao’s 4 percent target each month this year. Economic growth will slow to 9.3 percent in the last three months of the year, compared with 9.8 percent this quarter, according to the median of seven economists’ estimates compiled by Bloomberg.

Japan, the world’s biggest coal importer, is still contending with damage caused by a magnitude-9 earthquake and 23-foot tsunami that hit March 11. The country will buy 119 million tons this year, compared with 125 million tons in 2010, Barclays estimates. Economic growth will drop to 1.25 percent this year, from almost 4 percent last year, the median of 20 analysts’ estimates shows.

Supply Shortage

That won’t be enough to eliminate the anticipated supply shortage. Xstrata will report net income of almost $8.57 billion this year, compared with $4.69 billion last year, according to the median estimate of 10 analysts’ estimates compiled by Bloomberg. Coal accounted for almost 26 percent of Xstrata’s revenue last year, data compiled by Bloomberg show.

Shares of Xstrata rose 40 percent in the past 12 months, outpacing the 28 percent gain in the 126-member Bloomberg World Mining Index. The increase isn’t keeping up with profit growth, with the stock trading at eight times estimated earnings, down from almost 13 at the end of 2010. Twenty-six of 27 analysts tracked by Bloomberg rate the stock a “buy” or “hold.”

Rio, based in London, will report a 35 percent gain in net income to $19.3 billion in 2011 and Melbourne-based BHP a 73 percent advance to $22 billion in its fiscal year ending in June, the mean of estimates compiled by Bloomberg show.

Coal Producers

PT Bumi Resources, based in Jakarta and Indonesia’s biggest coal producer, rose 46 percent in the past 12 months. The stock is trading at 17 times estimated earnings, down from 21 times at the end of 2010, data compiled by Bloomberg show.

This year’s biggest coal acquisition so far was Abingdon, Virginia-based Alpha Natural Resources Inc. agreeing to buy Richmond, Virginia-based Massey Energy Co. for about $7.1 billion in cash and stock in January.

Australian coal production has already rebounded from mine closures caused by the worst floods in a half century in the eastern state of Queensland at the end of last year.

Xstrata’s first-quarter thermal-coal output in Australia rose 16 percent to 9.4 million tons from a year earlier, the company said in a statement May 4. BHP’s production rose 25 percent to 3.98 million tons in the same period, while Rio Tinto Coal Australia mined 1 percent less at 4.02 million tons, reports from the companies last month showed.

Global power generation from coal will rise by 25 percent from 2009 to 2035, the U.S. Energy Information Administration said in a report last month.

“Coal demand is strong and will stay that way,” Mark Pervan, head of commodity research at Australia & New Zealand Banking Group, said from Melbourne. “Industrial demand in Asia will be very energy-intensive, and that means a lot of coal.”

To contact the reporters on this story: Jason Scott in Perth at jscott14@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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