Morgan Stanley Says Coal Exporters Making Loss as Estimates Cut

Coal producers may need to cut exports of the steel-making variety after the lowest contract settlement with Asian buyers in seven years made more than half of global shipments uneconomical, according to Morgan Stanley.

About 157 million metric tons, or 60 percent, of exports from countries such as Australia and the U.S. will be shipped at a loss under the second-quarter contract agreed at $120 a ton, Joel Crane, an analyst at Morgan Stanley in Melbourne, said in a note today. The bank cut its 2014 and 2015 estimates for prices of coking coal, used to make steel, and the thermal variety.

Asian steelmakers are paying a record low for hard coking coal contracts on a quarterly basis while utilities in Japan have agreed to the lowest annual supply deal in five years as a glut crimps prices. About 13 percent of thermal exports are uneconomic under the Japanese deal of $81.80 a ton, said Morgan Stanley, which cut its 2014 spot forecast 9 percent to $77 a ton and its 2015 estimate by 5 percent to $85 a ton.

“A growing share of the seaborne supply community is operating at negative margins to cash cost, a consequence of committed development prior to the sustained price slump,” Crane wrote, referring to thermal coal. “Recovery likely requires a supply response.”

Morgan Stanley cut its 2014 coking coal estimate by 12 percent to $131 a ton and its 2015 projection by 4 percent to $165 a ton. Spot prices fell 11 percent to $113 a ton in March, data from Energy Publishing Inc. shows.

Coal Contracts

Metallurgical-coal suppliers traditionally held annual talks with steelmakers to fix benchmark contracts for the 12 months from April 1, the start of the Japanese financial year. They changed to quarterly accords in 2010. Prices were settled at $98 a ton in 2007.

Thermal coal at Australia’s Newcastle port, an Asian benchmark price, was at $73.52 a ton in the week ended April 4, according to globalCOAL, a London-based data provider. Prices slid 4 percent in March for a third monthly decline.

Morgan Stanley increased its estimate of a glut in the thermal market this year to 37 million tons, from a January projection of 4.9 million.

The bank also trimmed its 2014 price forecast for uranium by 4 percent to $38.84 a pound and its 2015 estimate by 5 percent to $45.50 a pound. The restart of reactors in Japan will remove uncertainty surrounding a supply overhang in the nation, Crane said.

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